Inherited IRA With No Beneficiaries Question

[njmoney]

Hoping for some help with a question(s) about an Inherited IRA with no beneficiaries named. My sister and I are trying to navigate through some of this and we have a lawyer and an accountant but we aren't getting clear direction from them (that's a whole other story!).

Here's the background:

- My mom passed away in 2021 at the age of 76 and had an IRA with no beneficiaries named (my father passed away before her)
- My sister (the executor) and I are named in my mom's will as 50/50 beneficiaries of her estate
- My mother had not taken her RMD for 2021 before she passed
- Since there are no beneficiaries on the IRA, my sister closed the IRA and moved the money to my mom's estate account

My questions are:

- Is closing the IRA and moving it over into the estate account the equivalent of taking an RMD? We want to make sure we take the RMD properly and don't get hit with a surprise tax penalty.
- If closing it and moving it to the estate account is the equivalent of taking an RMD, how is that reported come tax time? Maybe it all becomes part of my mother's final tax return?

Hope the above is clear. Thanks for any help! My sister and I are novices when it comes to RMDs and learning as we go.

[Catbert]

I'm not a tax expert so I hope someone who is will weigh in.  However, I hope this wasn't a large IRA since I think someone (probably the estate?) will owe taxes on the entire former IRA since it was all withdrawn. 

[secondcor521]

Most likely, the IRA custodian will have language in their agreement with your mother that if she fails to designate a beneficiary, that the default beneficiary of her IRA is her estate.

If her IRA is an estate asset, then it would pass according to the terms of your mother's will.  Since she probably did not specify a disposition for her IRA in her will, it probably would pass according to the residuary clause, which probably has the two of you splitting things 50/50.

If the above is all true so far, it's likely that your sister closing the IRA account was not proper even though she was the executor, because she didn't properly dispose of assets.  If so, you, as the beneficiary, probably could sue your sister for her failure to act properly.  This could, of course, lead to family discord.

What should have happened, anyway, is that your sister, as executor, should have worked with your Mom's IRA custodian to set up two inherited IRAs (one for each of the two of you as beneficiaries) and then funded it 50/50 from Mom's original IRA.  The two of you would have to work together to take your Mom's 2021 RMD before 12/21/21.  If your Mom was already subject to RMDs, I think you would then be able to take RMDs based on your Mom's life expectancy.  This would have stretched out the RMDs (and thus the tax bill) over another decade or two.  If your  Mom was not yet subject to RMDs, then you would each have 5 years to empty the IRA.  See https://www.wolterskluwer.com/en/expert-insights/secure-act-changes-distribution-requirements-for-some-individuals under "Not a designated beneficiary"

The mildly good news is that closing out the IRA as your sister did should count towards your Mom's RMD for this year, and since she took 100% of the IRA, then your Mom's RMD for this year should be satisfied and there will be no excessive deferral penalty.

Assuming your sister closed out the IRA after your mother died (right?), I think that entire distribution is probably taxable to your Mom's estate on your Mom's 2021 estate income tax return (Form 1041).  And it'll be less tax overall, but probably still a boatload of taxes, for the estate to pass through that income from the IRA distribution to the two of you via a K-1.  Bottom line, you'll have ordinary income equal to half of that IRA distribution added to your 2021 income taxes, which will be taxed on top of whatever other income you have this year.

The distribution should not be reported on your Mom's final income tax return if it happened after she died.  Basically, anything up to the day your Mom passed away is reported on her final income tax return.  Anything that happened after that in her name (i.e. before distribution) would be reported on her estate income tax return.  Anything that happens after distribution would be reported on your and your sister's income tax returns.

Note that an estate income tax return is done on Form 1041 and is not the same as an estate tax return that would be filed if your Mom passed away with more than $11.7M in her taxable estate.  A Form 1041 estate income tax return is due if her estate earns more than a few hundred dollars (I think it's $600, but check the Form 101 instructions).

(The estate might be able to keep the IRA distribution as income on the estate income tax return, but estate income tax rates are much higher, and brackets are much smaller, than for individuals.)

Really, the attorney should be advising your sister on what she should have done with the IRA, and the CPA should be advising her and you on the tax consequences and tax reporting.  I'm not sure why that's not happening, but that's sort of another problem that the two of you may want to figure out.  I could imagine them not being happy with what your sister did, but they are professionals and should not abandon her as a client just because she made (apparently) a mistake.  Unless she's not paying their bills or she is doing something else majorly wrong.

HTH.  IANAL.  YMMV.

[iluvzbeach]

I believe since there was no named beneficiary that the IRA funds were properly distributed to the estate. Since your mom was 76 at the time of her death she was already required to take RMDs. As of a few years ago, the length of time to distribute an IRA after death of the participant has been shortened significantly. I think it’s more along the lines of five years now. All this means is that the estate will have a larger tax bill now vs. potentially smaller tax bills over a period of five years (or whatever the timeframe is now.) Distributing the funds this year will cover her RMD for this year.

You’d probably be best served by speaking with a good tax person or attorney.

[njmoney]

Thank you for the replies! Especially appreciate the thorough response from secondcor521. No issues between my sister and I. She thought she was doing the right thing. We just have a terrible attorney that has not been very helpful in directing us in what to do on a variety of topics. And, as we deal with the different banks we find that the people at the banks are incredibly incompetent. It has been an eye-opening experience in many different and frustrating ways.

[SailingOnASmallSailboat]

You might want to check your state laws. When my aunt died a couple of years ago and had no beneficiary listed for her IRA, the state took half or more of it (I can't remember exact details) because there was no beneficiary listed. The rest went into her estate (which was just under $1 million in total.)

Made us triple check that we've listed beneficiaries, I can tell you.

[secondcor521]

You might want to check your state laws. When my aunt died a couple of years ago and had no beneficiary listed for her IRA, the state took half or more of it (I can't remember exact details) because there was no beneficiary listed. The rest went into her estate (which was just under $1 million in total.)

Made us triple check that we've listed beneficiaries, I can tell you.

That doesn't sound right.  What state did your aunt live in when she died?  Normally if someone doesn't have a beneficiary on an IRA, the default is to go to the estate.  If the person doesn't have a will, it would generally pass to relatives via the state's intestacy laws.

There are some states with a lower exemption amount and estate taxes and inheritance taxes, and someone may have used part of the IRA to pay for that - probably not a good idea but it could be done.

But as far as I know, no state just takes part of your IRA if you don't have beneficiaries.

[SailingOnASmallSailboat]

Just went back through the information to make sure. When she died in 2018 the IRA had to be cashed out immediately, with both the state and the federal government taking their cut. Total amounted to $35,000 on an IRA of $80,000. Confirmed by a couple of lawyers (one an estate attorney) and accountants.


Was in Vermont. It made us (and everyone in our family) make sure beneficiary information was complete on all accounts.

[secondcor521]

Just went back through the information to make sure. When she died in 2018 the IRA had to be cashed out immediately, with both the state and the federal government taking their cut. Total amounted to $35,000 on an IRA of $80,000. Confirmed by a couple of lawyers (one an estate attorney) and accountants.


Was in Vermont. It made us (and everyone in our family) make sure beneficiary information was complete on all accounts.

Ah, OK.  It sounds like it was high taxes because it was cashed out in a single year.  That part makes sense.  I though you were meaning that the state just declared themselves as a partial beneficiary somehow.

I've never heard of an IRA required to be cashed out immediately, but I don't know all the rules and I've only recently learned about estate taxation stuff.  It's possible that there were estate or inheritance taxes due overall and liquidating the IRA to pay those taxes is what made sense to whomever was taking care of her estate.

Thanks for the followup, I appreciate it.

[SailingOnASmallSailboat]

Ah, OK.  It sounds like it was high taxes because it was cashed out in a single year.  That part makes sense.  I though you were meaning that the state just declared themselves as a partial beneficiary somehow.

I've never heard of an IRA required to be cashed out immediately, but I don't know all the rules and I've only recently learned about estate taxation stuff.  It's possible that there were estate or inheritance taxes due overall and liquidating the IRA to pay those taxes is what made sense to whomever was taking care of her estate.

Thanks for the followup, I appreciate it.

It was helpful for me to go back and look again too, so thanks for the question. I'm not sure if things changed in 2019 with tax law changes but it sounded like at least then it needed to be cashed out immediately because there was no beneficiary named; if she had named one, there would have been a different timeline.

[iluvzbeach]

Right. The above is my understanding as well. When there is no beneficiary named, it goes to the estate and the period of time to distribute is not available as it would be for named beneficiaries. I, too, am not a lawyer or a tax person, but this is my understanding from many years in banking dealing with this type of stuff.

[njmoney]

Thanks for the additional information. The IRA isn't huge. It's about $16K of which I would receive $8K. Based on how the estate will be taxed versus how I would be taxed I'm estimating a loss of about $1,800 due to no beneficiaries being named.

Also, as mentioned, it has made me go back and ensure we have beneficiaries named on everything. And, I learned that consolidating banks will be important too. My mom had small portions of money spread across a lot of banks which has required a lot of visits to a lot of banks, a lot phone calls to banks and then often revisiting the same banks to clear up mistakes that bankers made. Hopefully it will spare our kids some headaches down the road by consolidating.