Five year old death and inheritence
I just reviewed an unusual case. My client inherited a Regular Ira and a Roth Ira. About 50K a piece. The problem I have is that the owner died five years ago. my client sent in all the paperwork and appears to have become the inherited IRA Beneficiary. The owner was under 591/2 so no RMD’S were taken or required. My client has not started taking any of the money yet. She doesn’t need or want the money yet. I believe she can still stretch this IRA. Let me know if I am correct as I m not 100% sure but I believe she can go back to the day the owner died, Take her required distribution and pay a 50% penalty for the previous five years then start her regular required distributions next year. I believe since she hasn’t touched the money yet and the owners name is still on the account that this will work. I sincerely hope that she will not be forced to take it all and therefore be taxed and penalized on the entire amouny…Can someone on here give me an absolute correct answer to this situation?
Rick
Permalink Submitted by Alan Spross on Sat, 2008-03-29 00:44
Rick,
Unfortuneately, the Regs are not that flexible. I assume this is a non spouse beneficiary. Following is pasted from the IRS Regs with respect to deaths prior to the required beginning date for both the 5 year rule and life expectancy distributions to a non spouse beneficiary:
Q–2. By when must the employee’s entire interest be distributed in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii)?
A–2. In order to satisfy the 5-year rule in section 401(a)(9)(B)(ii), the employee’s entire interest must be distributed by the end of the calendar year which contains the fifth anniversary of the date of the employee’s death. For example, if an employee dies on January 1, 2003, the entire interest must be distributed by the end of 2008, in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii).
Q–3. When are distributions required to commence in order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?
A–3. (a) Nonspouse beneficiary. In order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii), if the designated beneficiary is not the employee’s surviving spouse, distributions must commence on or before the end of the calendar year immediately following the calendar year in which the employee died. This rule also applies to the distribution of the entire remaining benefit if another individual is a designated beneficiary in addition to the employee’s surviving spouse. See A–2 and A–3 of §1.401(a)(9)–8, however, if the employee’s benefit is divided into separate accounts.
>>>>> >>>>>> >>>>>>
If the owner died prior to 2003, the 5 year period has also elapsed, however, there is a good chance the IRS will excuse the excess accumulation penalty, and leaves just the regular income tax on the lump sum distributions. The procedure to request relief from the 50% excess accumulation penalty is on p 6 of the 5329 Inst. in the event that owner died prior to 2003. I suppose the “RC” (reasonable cause) for the omission could be that the IRA custodian did not provide notification of any RMD requirement.
Permalink Submitted by Bruce Steiner on Sun, 2008-03-30 04:40
The current (2002) regulations are more favorable than the old proposed regulations. The IRS recently explained in PLR 200811028 that under the current regulations, unless the IRA provides otherwise (you may want to check the IRA agreement to see what it provides), or the IRA owner elected otherwise, the default is the life expectancy method rather than the 5-year method. That ruling illustrates that the failure to take the first required distribution does not constitute an election to use the 5-year method. Absent a sufficient reason to waive the penalty, the beneficiary will owe a penalty for failing to take the 2004 through 2007 distributions on time, but this won’t jeopardize the stretchout.
Here is a link to PLR 200811028:
http://www.irs.gov/pub/irs-wd/0811028.pdf
Of course, private letter rulings are not binding on the IRS except with respect to the taxpayer to whom they are issued.
I wrote an article on this for a professional publication, which will be published soon.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL