How should I Handle Inherited Real Estate held in Self-Directed IRA

[BikingEngineer]

I'd like some recommendations on how to handle an inheritance situation that seems to keep getting more complicated the deeper I dig. For background, my Mother-In-Law recently passed away. She left her assets to be split equally between her daughters, with pretty much everything set up through TOD/POD beneficiary methods. The issue we're running into is with her IRA.

This IRA is a Self-Directed IRA (Traditional) with some liquid capital in it, and a California condo. Capital is ~~$60k and the condo is worth ~~$330k. This needs to be split equally down the middle, and per my reading of IRS rules needs to be disbursed within a decade. The problem we're running into is that the company in which it's held doesn't seem to understand IRS rules, and wants to transfer it all into one person's name all at once (my understanding is this would trigger a taxable event). I'm thinking we'd want to do a trustee-to-trustee transfer of the account into a jointly-held trust, liquidate the property, and then split distributions out of that over a 5- to 10-year period to minimize the tax implications and stay on the IRS' good side.

Am I way off base here? Who would I talk to about getting this set up? The company that holds the trust seems to be worse than useless and sent some forms over that didn't reflect the current options outlined in current tax law.

[dandarc]

Try and get the custodian to just sell the condo first and then split the IRA which would then consist of easily split assets after that is done.

[dandarc]

Forgot to say - sorry for your loss and also thanks for the reminder that doing non-standard stuff in tax advantaged accounts needs to be well thought out - "what happens when I die?" probably didn't cross your MIL's mind or at least thought it would really be as simple as the salesperson claimed when she set this up.

[BikingEngineer]

Thank you for the condolences.

We've been working like hell the past 4ish months to get things as squared away as possible (terminal cancer diagnosis got things moving), but there were still renters in the condo which complicated things (California COVID restrictions didn't help).

The custodian is, as previously stated, useless at best and hard to work with if they even take your call. They seem to think that they can't touch anything associated with the account now that she's passed, and it needs to be somehow split and transferred before they can act. I disagree with their assessment but am not a lawyer and can't back up my reading of the rules with any sort of credential.

The IRA was actually set up by my late Father-in-Law, who was a title insurance professional and very savvy about such matters, my late Mother-in-Law was not (it was only transferred into her name in January of this year, and FIL had been deceased for 7 years prior). Having read up on this type of investment.... let's just say it would not have been the way I would have gone.

[dandarc]

Ah - wonder if there is an instructions document from FIL somewhere. That piece of paper might have been filed away and forgotten, but might clear a lot up if you find it. Kind of thing people often do for their spouses, but spouse might not read the whole thing.

Might be worth hiring an attorney that is very familiar with real estate in California. Even if it cost $20,000, that would probably be worth it just to get things settled up in a way you can be confident is in-line with the law.

[oldmannickels]

I've never done this but I don't think an IRA account can be held jointly and an estate/trust can't hold an IRA account because there's no life (age) associated with either account. So I think both your wife and her sister would have to open self-directed inherited IRAs which would both own 50% of property. Then another wrinkle is that since you're living in the property owned by the IRA you might have prohibited transaction, which would blow up the whole thing.

[BikingEngineer]

We're not living in the property. My wife and I live in Illinois and the SIL is in a separate apartment. The aforementioned renters were unaffiliated 3rd parties that have provided notice and should be out at the end of this month. I'm still trying to wrap my head around the split of property in such a way as to avoid a taxable event. I guess I'll be reading up on California real estate law tonight, and also maybe researching attorneys in the area.

[SeattleCPA]

This isn't very helpful to the OP. but this is an example of how these "clever" tax planning ideas like using a self-directly IRA for direct real estate investment don't really make sense.

I will observe that had this condo be held directly by mom, there would be no gain and no tax. (Due to the Section 1014 step-up in basis.)

The other thing OP wants to note/remember: You want to see if the IRA owes any 990-T tax returns. Hopefully it doesn't. But it might.

[BikingEngineer]

I'm 1000+% with you on this particular structure being a lot more trouble than it's worth. Direct ownership would have been much easier to manage.

On the subject of 990-T, I dug in a bit and this (thankfully) shouldn't apply, as it wasn't a leveraged asset at any point so there's no Unrelated Business Income.

I read into the account agreements, and found the verbiage I needed to get the Custodian to properly process things. Their CSR was just not particularly competent or open to listening, it's not in my name but I'll be on the next call to get everything straightened out (neither the wife nor SIL are confrontational, I can turn that on as needed). There's a clear paragraph allowing the designated beneficiaries to direct investments after the account holder's death, so we'll be going that direction then setting up RMDs to automatically deposit as appropriate. Fingers crossed we can get to the proper level of employee to get this done.

[seattlecyclone]

One thing you might want to be aware of is that there's not actually any requirement to split the IRA. If the beneficiaries agree to an investment strategy and withdrawal timeline together, there's no reason they couldn't leave it as one account for the full ten years. This used to be a bad idea because you'd need to do RMDs based on the life expectancy of the oldest beneficiary, but now that everyone's on the ten-year rule this bit doesn't matter so much. The matter of agreeing on withdrawals still remains. Split it up and you can each do your own thing. If you do want to split it, you'll need to do it by the end of the year after your MIL passed away.

[BikingEngineer]

That's very good information, and would greatly simplify things. Wife and SIL are in agreement on the 10 year RMD plan (and I've reviewed it and found it to have acceptable foreseeable tax impacts), so that'll work nicely (so long as the Custodian doesn't mess things up).

[SeattleCPA]

On the subject of 990-T, I dug in a bit and this (thankfully) shouldn't apply, as it wasn't a leveraged asset at any point so there's no Unrelated Business Income.

That should be right.

[Catbert]

Once the condo is sold, splitting the cash into separate IRAs will be (should be) simple.

Buying real estate in an IRA was a thing some financial planners pushed back in the 90s(?).  I looked into it at the time and even leveraged it looked like a tax disaster waiting to happen.

[SeattleCPA]

Once the condo is sold, splitting the cash into separate IRAs will be (should be) simple.

Buying real estate in an IRA was a thing some financial planners pushed back in the 90s(?).  I looked into it at the time and even leveraged it looked like a tax disaster waiting to happen.

I don't know if financial planners were selling this. But I observed that ten years ago, twenty years ago, real estate fanatics often pitched this idea.