Inherited IRA with estate as beneficiary | Ed Slott and Company, LLC

Inherited IRA with estate as beneficiary

Client walks in the door needing to probate her Mom's estate. Mom was 92 at time of death. Client discloses that "Mom" had an IRA at a local bank. Upon further digging, IRA was originally Dad's. Mom was beneficiary. At the time of Dad's death, Mom lacked mental capacity to transfer the IRA into her name. Instead, their only child (daughter), had the IRA transferred to Mom using daughter's power of attorney. However, Bank would not allow POA-holder to name herself the beneficiary. Long story short, Mom's estate is the beneficiary of the IRA and now Mom is deceased.

In this case, we're dealing with a entity beneficiary and an account owner that died AFTER his required beginning date. Thus, according to publication 590-b we can distribute by dividing the account balance at the end of the previous year by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix B. We use the life expectancy listed next to the owner's age as of his or her birthday in the year of death and we reduce the life expectancy by one for each year after the year of death.

But how does this actually work in practice? If the estate is the beneficiary, that means the distribution checks will be made payable to the estate. So does that mean we have to keep the estate open until the IRA is fully distributed? I really don't want my client to get hit with all the taxes over the course of just one or two years, but at the same time, keeping the estate open for the next decade or more simply isn't feasible. The administration costs alone will likely outweigh the benefits of stretching out the taxes.

  • An estate inherited IRA can be assigned to the estate beneficiaries by the estate executor, so the estate can be closed as soon as all assets have been distributed. 
  • In cases like this it is always useful to look back to see if Mom took 100% of her beneficiary RMDs each year, because if she did not then she defaulted to ownership status. That would save the stretch for the next beneficiary, but in this situation where the beneficiary's estate is the next beneficiary it may not make much of a difference.  Would have to know the age of Dad and year he passed, and Mom's age that year. In other words, Mom's estate is the beneficiary either way, but is her estate a successor beneficiary to Mom OR just the beneficiary of Mom?  This will affect the length of the limited stretch that remains.
  • And the above also ignores the possibility of any legal action for not accepting the daughter's authority under the POA to name a beneficiary. Usually, barring a very large account and potentially long stretch, it is not beneficial to battle the deep pockets of large IRA custodians. 

  • Life expectancy at 92 isn't very long.  So it would probably be simpler to keep the estate open until the IRA is fully collected.
  • If (i) the power of attorney didn't allow the daughter (as Mom's agent) to name beneficiaries (ii) there were younger contingent beneficiaries who were the same people Mom provided for in her Will, and (iii) daughter (as agent) had the power (under the power of attorney) to disclaim on Mom's behalf, daughter might have disclaimed the IRA on Mom's behalf when Dad died.
  • Bruce Steiner
 

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