[IMGCAP(1)]If the beneficiary of a deceased owner of an individual retirement account fails to comply with the post-death required minimum distribution rules and the other post-death IRA distribution rules, then the beneficiary can be subject to penalties from the Internal Revenue Service.
Practitioners should know the rules and work with the custodian of a deceased IRA owner to make sure the post-death rules are complied with. This is important since the beneficiaries of an inherited IRA may not know the rules. The Treasury Inspector General for Tax Administration recently released a report on the need for the IRS to educate and notify taxpayers of the required minimum distribution requirements for IRAs.
The IRS assumes that IRA custodians will handle the post-death IRA distribution rules regarding beneficiaries of inherited IRAs. However, IRA custodians are not required to advise beneficiaries of inherited IRAs as to the post-death IRA compliance rules under the IRS regulations.
Here are a few points that beneficiaries of inherited IRAs and practitioners should know about:
1. If an IRA owner dies on or after his or her required beginning date, then any amount of the unpaid required minimum distribution for the year of the IRA owner’s death must be paid to the beneficiary of the IRA owner. This is necessary in order for the beneficiary to avoid any IRS penalties.
This issue frequently comes up since many IRA owners wait until the end of the calendar year to take their annual required minimum distribution or take only monthly required minimum distributions. As a result, many IRA owners pass away before taking their full required minimum distribution for the year of death.
2. If the surviving spouse is the beneficiary of an IRA owner, then the surviving spouse is not permitted to rollover or transfer the decedent’s IRA account to the surviving spouse’s IRA to the extent of any unpaid required minimum distribution attributable to the deceased IRA owner.
Any such rollover or transfer of any unpaid required minimum distribution attributable to the deceased IRA owner by the surviving spouse is considered to be an excess contribution. This must be corrected in the manner described by the IRS in order to avoid excess contribution penalties.
3. If there are multiple nonspouse beneficiaries of an inherited IRA, then there are special timing rules and titling rules that apply in order to allow each nonspouse beneficiary to use his/her life expectancy in determining the post-death IRA distribution payout periods to such nonspouse beneficiaries.
4. If a trust is the beneficiary of a decedent’s IRA, then the IRS rules are extremely complex. The trustee should obtain the assistance of an advisor so that the trustee of the IRA trust can comply with the post-death IRA distribution rules and avoid penalties.
The inherited IRA rules are complex and it is doubtful whether the IRA custodians will take on the responsibility of notifying the beneficiaries about all these technical rules.
As a final point, the advisor to an IRA beneficiary must keep up with the rules. There is a need to have an advisor who is aware of all the technical issues that must be addressed on the death of the IRA owner. It is important that accounting societies, bar associations and other professional organizations expand their education programs on the IRA distribution rules. A two-hour continuing education program cannot give an advisor enough in-depth training on the subject.
Seymour Goldberg, CPA, MBA, JD a senior partner in the law firm of Goldberg & Goldberg, P.C., Long Island, New York, is Professor Emeritus of Law and Taxation at Long Island University. He has taught many CLE and CPE programs at the state and national level as well as CLE courses for the New York State Bar Association, City Bar Center for Continuing Legal Education, NJICLE, local bar associations and law schools. He has been quoted in major publications including The New York Times, Forbes and The Wall Street Journal and has been interviewed on CNN, CNBC and CBS. Mr. Goldberg is a member of the IRS Long Island Tax Practitioner Liaison Committee and the Northeast Pension Liaison Group. He was formerly associated with the Internal Revenue Service and has been involved in conducting continuing education outreach programs with the IRS. He is the chairman of the Estate & Financial Planning Committee of the Suffolk Chapter of the New York Society of CPAs. He has recently updated his manual called “Inherited IRAs: What Every Practitioner Must Know, 2015 Edition published by the American Bar Association. For more information on this book, please visit the ABA online book store at www.shopABA.org and search for it using Product Code 1620656.
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