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johnl

Disclaiming an IRA?

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Asking this to help out a friend whose father recently passed.  Brief background info---

 

Father died unmarried a few months ago.  He had 5 children - all adults of age.  The first 4 by his first wife, the last by the second wife after the first wife passed away. He was divorced from the second wife years ago.

 

Father left a will, he granted the oldest daughter ownership of his truck, with everything else (bank accounts, Merrill Lynch investments, personal effects) split equally 5 ways amongst his children.  Eldest daughter name the executrix.

Father also had a regular IRA and a Roth IRA- eldest daughter was named the primary beneficiary on both with NO secondary beneficiary listed.

 

Oldest daughter would prefer to disclaim her primary beneficiary status on the IRAs and have them become part of the estate to be distributed 5 ways to the siblings as if they were part of the estate.  This is for a variety of reasons:  to make the distribution of assets more 'fair' to the other siblings and keep the peace amongst the family; to avoid increasing her tax bracket due to the distributions, etc.  Also the youngest son, who is from the second wife, has hired his own attorney that is probing into things and complicating matters.  The divorce between the father and his mother was quite acrimonious.  The executrix would like to just distribute all of the assets at once and avoid having to deal with any issues he/his mother/his lawyer may bring up down the line. 

 

From the research I have done to help out, it appears this is possible.  One site I found states: "Generally, a beneficiary disclaiming an inherited IRA is pretty straightforward – spelled out in Internal Revenue Code §2518, as long as the primary beneficiary executes a written instrument to disclaim all or a portion of the inherited IRA within 9 months of the death of the original account owner, the contingent beneficiary(s) will inherit the remaining account."

 

A couple of her concerns that I hope you can help with with:

  • Since there are no 'contingent beneficiaries' named on the IRAs, I would assume his estate would become the beneficiary.  His first wife died decades ago, and he was legally divorced from the second wife at least 10 years ago.  Obviously, the other siblings would agree to this arrangement since technically the eldest daughter could just keep the IRAs for herself.  Due to her generosity they would all benefit from her disclaiming.  
  • If the eldest daughter disclaimed her primary beneficiary status, would that affect her ability to get her 1/5 of the IRA funds after the accounts are liquidated and made part of the estate?
  • How will the eldest daughter know the appropriate language to use in the written instrument?   It seems like this is not a standard document, and her lawyer does not seem to know anything about this process.  

 

The eldest daughter had thought about gifting 1/5 of the annual distribution to each of the siblings every year, but that may necessitate filing Gift Tax informational forms every year.  Also, what happens if one of the siblings passes away?  Is it split into fourths or should the deceased sibling's family get the share?  It just could become quite complicated and lead to family problems down the road.  The eldest daughter also thought about just liquidating the IRAs now and gifting 1/5 to each of the siblings.  However, this would also create gift tax issues due to the value of the IRAs.  It would have to be done over several years, or she would have to gift in excess of the annual exclusion and thus have to file gift tax returns.  The disclaiming seems like the easiest and cleanest way of distributing the funds amongst the siblings.

 

Hope someone out there could provide some guidance on this issue!


Thanks!

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6 hours ago, johnl said:

A couple of her concerns that I hope you can help with with:

 

  • Since there are no 'contingent beneficiaries' named on the IRAs, I would assume his estate would become the beneficiary.  His first wife died decades ago, and he was legally divorced from the second wife at least 10 years ago.  Obviously, the other siblings would agree to this arrangement since technically the eldest daughter could just keep the IRAs for herself.  Due to her generosity they would all benefit from her disclaiming.  
  • If the eldest daughter disclaimed her primary beneficiary status, would that affect her ability to get her 1/5 of the IRA funds after the accounts are liquidated and made part of the estate?
  • How will the eldest daughter know the appropriate language to use in the written instrument?   It seems like this is not a standard document, and her lawyer does not seem to know anything about this process.  

 

If she disclaims her interest in the IRA the specific effect of that disclaimer depends on the applicable state law, and you did not mention the state in which the father was domiciled when he died and, if different, in what the state the IRAs are held. It also matters what the IRA contract says. If you provide the state some state specific information can be provided.

 

That said, in most states the effect of the disclaimer is that for purposes of distributing that disclaimed asset the eldest daughter (ED) would be treated as though she predeceased the father. So then you would look at the IRA contract first to determine who gets that IRA. If the contract specifies default beneficiaries if none are named by the account holder (the father) then those default beneficiaries will get it. If the contract does not specify any default beneficiaries then it goes to the father's estate. She would make the disclaimer by delivering to the IRA trustee a written document in which she states she is disclaiming her interest in the IRA. The IRA trustee might have a form for that. If not, a simple written statement signed by the ED should suffice. Exactly what information needs to be in that statement will again be determined in part by the applicable state law. At a minimum, though, she needs to identify the specific asset (e.g. IRA account # XXXYY) and state that she is disclaiming her interest in it. For federal gift tax purposes the disclaimer must be done within 9 months of the father's death.

 

If the IRA goes to the estate it is possible she may still get her equal 1/5 share of the IRA. That again will depend on the applicable state law. However, if she would not get that 1/5 share on a complete disclaimer then she could work around that by disclaiming all but a 1/5th interest in the IRA. So she'll need to know how that disclaimer will work if the IRA goes to the estate to figure out what is needed to get the result she wants.

 

It is almost certainly NOT a good idea for the estate to immediately liquidate the IRAs and then distribute the cash since that will trigger taxable income to the estate for the entire value of the IRAs. That income would get passed through to the beneficiaries if the distribution from the estate to them was done in the same tax year. But if the IRA is split into 5 IRAs and those IRAs are distributed then each beneficiary only has taxable income when he or she takes distributions from the IRAs. They can do that over a period of years, which can be tax favorable to them. This assumes that these are traditional IRAs. If they are Roth IRAs then this isn't a problem.

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Hi Tax Counsel,

 

The father was a lifelong resident of Louisiana.  I will have to ask the daughter if she has the specific details on the IRA.  I believe it was with Merrill Lynch....in fact I think it was the ML rep that suggested this to her in the first place.

 

There are 2 IRAs...one is a traditional and one is a Roth.  I believe there is about the same amount in both of them.  So maybe it would be a good idea to follow through with disclaiming the Roth but not the traditional.

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The daughter may want to consult with an income tax preparer or professional in her area to have her income tax calculated under both scenarios, whether disclaiming or not disclaiming, to evaluate what her actual tax consequences would be.  It could turn out that there would not be much advantage to disclaiming and perhaps she would be better off not to disclaim and then divide up the funds herself and distribute the money however she wishes.

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On 8/30/2019 at 6:26 PM, johnl said:

There are 2 IRAs...one is a traditional and one is a Roth.  I believe there is about the same amount in both of them.  So maybe it would be a good idea to follow through with disclaiming the Roth but not the traditional.

 

If she does that she is giving up the nontaxable Roth and electing to pay the tax on the distributions she gets from the traditional IRA. Not the best tax move on her part.

 

2 hours ago, RetiredinVA said:

I don't believe it is possible for a person to be a beneficiary of an IRA or other qualified asset, and then divide it up themselves.

 

Sure, she could do that. But then she has the income from the traditional IRA to include in her income and what she then gifts to others would be gifts from her that, if her total gifts over the year to any one person are large enough, would be subject her to having to file a federal gift tax return. What she can't do is take control of the IRA and also avoid the tax consequences. So if she doesn't timely disclaim she'll take the tax hit.

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What I meant was, I don't believe a person can accept an IRA and then divide it into multiple IRA.s to give to her siblings.  Yes, she can liquidate the IRA and give out the money.  But all of the funds received from the liquidation of the traditional IRA (not the Roth IRA) would be charged to her as income.  If she disclaims, the IRA would be distributed to the siblings as IRA's without tax consequences.

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2 hours ago, RetiredinVA said:

What I meant was, I don't believe a person can accept an IRA and then divide it into multiple IRA.s to give to her siblings.  Yes, she can liquidate the IRA and give out the money.  But all of the funds received from the liquidation of the traditional IRA (not the Roth IRA) would be charged to her as income.  If she disclaims, the IRA would be distributed to the siblings as IRA's without tax consequences.

 

I see what you meant, and you're quite right. She cannot receive the IRA and then split it herself into multiple IRAs for the siblings. If she wants them each to end up an IRA out of this, she would have disclaim some or all of her interest in the IRAs to do that.

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Thanks to everyone for the replies.

 

I am a little confused by some of the responses.  I was under the impression that the only one that could keep these accounts as IRAs would be the daughter as the only named beneficiary.  I did not think it was possible for the IRA accounts to remain as IRAs for anyone else.  If the IRAs are disclaimed I didnt think it was possible to split them up into 5 new IRA accounts.  


My understanding was that if she disclaims and then the IRA goes to the estate, the IRA would basically be liquidated and cease to exist as an IRA account.  The cash could then be divided amongst the siblings as per the tenets of the will.  With the Roth, there would be no tax consequences.  

 

If she disclaimed the traditional IRA, wouldn't the ESTATE be required to remit all of the taxes owed at the time of liquidation?  I don't see how it would be the sister's taxable income since she is not the one directly inheriting it anymore.  I would think the estate would be required to pay the tax due, or would each of the siblings have taxable income equal to 1/5 of the entire taxable amount due in the year in which this happened?

 

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