5yrs. to settle estate

Submitted by Jason Davis on Tue, 2010-08-31 16:47

Have a client whose out of state father died intestate. He is just now being recognized as the beneficiary of the IRA. Custodian is asking if he wants it to go into a beneficiary IRA. Is this still allowed due to time that has passed? Also, is there any liability for the missed RMD’s, IRA owner was 70 1/2 at death. The son was not allowed to doing anything during the 5 years. My inclination is to just distribute this year since it only about $30k.



Submitted by Alan Spross on Tue, 2010-08-31 20:14

The beneficiary IRA can be created, but since his father passed PRIOR to his RBD with the estate as probable default beneficiary, the 5 year rule applies. 2009 does not count as one of those years due to the RMD waiver in 2009. So the beneficiary has until the end of the 6th calendar year following the year his father died to fully distribute the beneficiary IRA. Therefore, so far there has been NO missed RMDs.

But note that I indicated the estate as the PROBABLE default beneficiary. There are a few IRA agreements that specify other defaults, such as a surviving spouse or the children. If so, that changes things so be sure to check the IRA agreement to verify that the estate is in fact the default beneficiary. If not, please advise.



Submitted by Joseph Arsenault on Wed, 2010-09-01 18:01

I am working with an attorney right now on an estate that has been open for 5 years. The IRAs benis are the kids. They have been taking their RMDs so there is no issue. This leads me to a question though. If they have not taken their RMDs and the estate is not the beneficiary, assuming the beneficiaries are all identifiable individuals, do you think it would be as simple as taking all 5 years of RMDs at once and then requesting the waiver of penalties?

And then, for RMD calculation purposes,what is your opinion on missing the Dec 31st deadline 3 years ago? Oldest beneficiaries age, owners age, or 5 year rule as ADP? I was thinking that missing the deadline when the owner dies before his RBD automatically switches you to the 5-year rule, but I can’t quite remember.



Submitted by Joseph Arsenault on Wed, 2010-09-01 18:07

Perhaps after 2006 they are allowed use the oldest beneficiaries life expectancy when missing the deadline even if the owner died before his RBD? I feel like their are cobwebs on this issue..



Submitted by Alan Spross on Wed, 2010-09-01 20:07

Joe,

See the attached link to an article by Ed describing the impact of PLR 2008 11028. This sheds light on your question:

http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…

As long as individuals were designated as IRA beneficiaries, they could restore the stretch, however only using the life expectancy of the oldest if separate accounts had not been created by the deadline. The ruling does not say how many years the beneficiaries could go back, but in 2008 it was probably as far as the 2002 RMD ruling. I see no downside to acting on this ruling and even requesting a waiver of the 50% tax based on reasonable cause. If the IRS denied the penalty waiver it should not imperil the stretch.

But this ruling also assumes that the IRA agreement had been updated to the 2002 default of life expectancy distributions if death occurred prior to the RBD. I have heard cases of a few agreements that were not updated, ie the 5 year rule was required. This must be very rare by now, but if the agreement required the 5 year rule, then the stretch could not be restored.



Submitted by Joseph Arsenault on Wed, 2010-09-01 20:31

Alan,

Thanks a ton. I was having trouble with this one even through the CCH wealth management section. I appreciate the info on this.



Submitted by Alan Spross on Wed, 2010-09-01 21:18

Currently the IRS does not write authoritative Regs or even less authoritative Notices in many areas, in favor of a series of non binding private letter rulings. Outfits like CCH are hesitant to publish rules based on PLRs when the PLRs are only binding for the applicant that requested same. Some PLRs can be relied on more than others based on the characteristics of the applicant’s case, but none of them are technically binding.

A great example of this is where the Code allows a non spouse beneficiary of a QRP to transfer to an inherited IRA, but the ability of a spouse to do that is only contained in PLR 2004 50057. Because of this some IRA custodians will not set up an inherited IRA for a spouse while they will for a non spouse. The idea of a spouse operating under a more restrictive rule than a non spouse is inconsistent with the entire compilation of rulings. Still, after 6 years we are still looking for a Regulation or code section authorizing a spouse beneficiary to create an inherited IRA from which penalty free distributions can be taken.



Submitted by Joseph Arsenault on Wed, 2010-09-01 21:42

Yea you are right about that, although Bob had written some good material for the Wealth Management program in the past that was based mostly on PLRs like you have mentioned. Still, I have run into what you have mentioned. I usually try to combine several resources but this is definitely an area where there seems to be a lack of regulatory authority (IRA, qualified plan, pension taxation).

There are many issues i have cited in my personal notes solely off of PLRs, I will be adding this one! Thanks again.



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