Will this work to minimize taxes on inherited IRA?

[SLC Tortfeasor]

Please chime in if you know the answer to these questions, so that I can avoid the cost of hiring a CPA to answer them!

My mom died in October 2023. She left her house to my sister, and her IRA to me. My sister is the successor trustee in charge of closing out my mom's estate. Once my sister has paid funeral expenses, taxes, and wrapped up a few other things, her last responsibility will be to give the IRA to me. This should likely happen sometime in Fall 2024.

My Mom was required to take RMDs from her IRA, so I will also be required to take RMDs once I inherit the IRA. Questions:

1. Will my sister be required to take the RMD from my Mom's IRA in 2024? Or can she avoid taking an RMD with the understanding that I'll take it from the IRA when I inherit it?

2. If my sister takes an RMD from my Mom's IRA in 2024, does that relieve me of the obligation to take the RMD for 2024?

Here's why this matters to me:
My mom's estate will be in a much lower tax bracket than me for 2024. So it seems preferable (if it jives with tax law, that is) to have my sister pay various estate expenses using the proceeds from the 2024 RMD. The estate will pay income taxes on the RMD at the estate's low tax bracket, which is better than me paying taxes on the RMD at my higher tax bracket.

In other words, we could save a lot of money if my sister takes the RMD, pays the taxes on it at my mom's lower tax bracket, and then I don't have to take the RMD for 2024 when I inherit.

On the other hand, if I'll be required to take the RMD in 2024 regardless of whether my sister has already taken the RMD, then it doesn't matter.

Thoughts?

 

[pb4uski]

I'm a little confused because you refer to your sister as a trustee but in other parts of the post refer to an estate. A trustee oversees a trust. An estate is overseen by an executor (executrix if the executor is female).

Was the house in a trust or does your sister inherit the house via your mother's will? Similarly, are you the beneficiary of the IRA or is a trust the beneficiary of the IRA and you are the beneficiary of the IRA under the terms of the trust?

Since you didn't mention a trust other than referring to your sister as the trustee I'll for the moment assume that there is no trust involved. If that is the case, typically you would inherit the IRA directly from the financial institution that it was held at. (Check to see if your mother's RMD for 2023 was made).

 

[statsman]

In the year I inherited my mom's IRA, a year for which she hadn't taken the RMD yet, I was required to take my portion of the RMD under my tax ID. I don't think you can take the RMD under the estate of the decease unless such a withdrawal was done before they passed away.

Now waiting to see if I have this wrong ...

 

[GrayHare]

IRAs are usually handled separately from an estate, so transfer to the beneficiaries happens independently. If you are the IRA beneficiary, you will need to withdraw its funds within 10 years starting in 2024, and you will be subject to the associated taxes, not the esate.

 

[RE2Boys]

I may be completely wrong, not being a lawyer, but I don't see why your sister in involved at all unless your Mom has not taken her RMD for 2023. The RMD would be reported on your Mom's final income tax return if taken prior to her death. Otherwise, you would be required to take both the 2023 and 2024 RMDs, likely under your SSN and pay taxes.


A beneficiary designation overrides any language in any will (unless the will specifically cites the estate as the beneficiary). So if you are the named beneficiary on the IRA, it became yours the moment your Mom passed away. You need to contact the IRA custodian to have the IRA converted to an inherited IRA.

 

[SLC Tortfeasor]

I'm a little confused because you refer to your sister as a trustee but in other parts of the post refer to an estate. A trustee oversees a trust. An estate is overseen by an executor (executrix if the executor is female).

Was the house in a trust or does your sister inherit the house via your mother's will? Similarly, are you the beneficiary of the IRA or is a trust the beneficiary of the IRA and you are the beneficiary of the IRA under the terms of the trust?

Since you didn't mention a trust other than referring to your sister as the trustee I'll for the moment assume that there is no trust involved. If that is the case, typically you would inherit the IRA directly from the financial institution that it was held at. (Check to see if your mother's RMD for 2023 was made).

Sorry, let me clarify: All assets, including house, are held by the trust. The trust is the beneficiary of the IRA and the trust instructs the trustee (my sister) to give the IRA to me.

 

[GrayHare]

Sorry, let me clarify: The trust is the beneficiary of the IRA and the trust instructs the trustee (my sister) to give the IRA to me.

I'm thinking the only way a trust can transfer an IRA's funds to you is to first withdraw from that IRA, and pay the hefty taxes, but I'm not sure on that. In that case, you would not have an inherited IRA.

 

[cathy63]

I'm thinking the only way a trust can transfer an IRA's funds to you is to first withdraw from that IRA, and pay the hefty taxes, but I'm not sure on that. In that case, you would not have an inherited IRA.

Some info from Morningstar on transferring inherited IRAs out of a trust: https://www.morningstar.com/financial-advice/can-trust-transfer-an-ira-trust-beneficiary

SLC Tortfeasor -- your sister needs to read the trust docs and possibly consult with the attorney who drew them up. Most likely the trust can take the RMD and pay the taxes then distribute the remainder of the withdrawal to you; but without seeing the actual trust paperwork it's impossible to say for sure. Either way, you or the trust still has to empty the account within 10 years.

Do verify that the trust actually has a lower tax rate though. Any amount of trust income over $3100 will be at 24% or higher.

 

[GrayHare]

Interposing a trust as temporary beneficiary sure adds complications, but I guess there might be reasons to structure things that way. That Morningstar link is a good one. Seems like it might be possible to move the IRA intact out the trust if everything is done right and the custodian is onboard. Fido has some info on what it takes to avoid the trust emptying the IRA within 5 years https://www.fidelity.com/viewpoints/wealth-management/insights/iras-left-to-a-trust

 

[pb4uski]

Interposing a trust as temporary beneficiary sure adds complications....

+1 IMO it's insane to have a trust be beneficiary of an IRA if the trust document in turn names an individual as the beneficiary of the IRA... why? Much easier to just designate the individual as the beneficiary of the IRA.

 

[SecondCor521]

My condolences.

@cathy63 made the same point I would: Any RMD from the IRA done by the estate would be at estate tax rates, not your Mom's lower tax rate while she was alive. You can see the estate tax rates yourself by looking at IRS Form 1041 Schedule G line 1 instructions (yeah, they kind of bury it) at https://www.irs.gov/instructions/i1041#en_US_2023_publink1000286211

(Depending on the kind of income in your Mom's estate, it could also owe NIIT as well, which is an additional 3.8%. The key point is that the rates and brackets are far more aggressive for estates and trusts than for individuals.)

To generally answer your questions about RMDs, though:

1. Your Mom was responsible for her 2023 RMD, and she may have taken some or all of it before she passed away.

2. Any remaining 2023 RMD is the responsibility of the beneficiaries (ie you). I believe you have until April 15, 2024 to take the remaining 2023 RMD (see https://www.bogleheads.org/forum/viewtopic.php?p=7252488#p7252488). If you don't, then you'll probably want to look at filing Form 5329 I believe it's Part IX and requesting a waiver of the penalty, which is 25% or 10% of the amount not timely taken depending on the circumstances.

3. You may or may not be subject to RMDs starting in 2024. The IRS is trying to implement new rules in this area but they are only in the proposed state and are not yet final. If applicable, the 2024 RMD would be the responsibility of the beneficiary, and you would have until 12/31/2024 to take it. The 2024 RMD would be based on your age on your birthday this year and your Mom's 12/31/2023 ending IRA balance.

Since your Mom chose to have the IRA pass through a trust (which I agree is an unusual choice), that could have implications on the above and I would highly recommend that you consult with a CPA you trust and your Mom's estate planning attorney if they are available. In particular, you may be subject to the 5 year rule even though you'd probably prefer to be subject to the 10 year rule. There is also the matter of changing IRS rules in this area. This can get complicated so you need local advice who can look at the whole picture and the trust document.

Before doing that, you probably want to read the section "Trust as beneficiary" in IRS Pub 590B about page 14 at https://www.irs.gov/pub/irs-pdf/p590b.pdf. It would also be helpful for you to work through the "IRA beneficiaries" section starting a bit earlier in that document about page 9.

While the IRA is in the trust, your sister as the trustee is responsible for it and probably also for timely distributions of any required RMDs. You might discuss this aspect of it with her, since you said the IRA won't be distributed to you until later this year. She might try to get it transferred to you sooner since that might be better for you.

 

[lem1955]

I inherited an IRA from my father in 2023. The lawyer we were working with would not release the IRA to my sister and me until all the terms of the Trust were met - Donations and gifts to other relatives. Although I knew there was plenty of money in other accounts to satisfy the terms, the lawyer insisted, and we did as told.
The advisor who managed DF's assets paid almost all of his 2023 RMD before he died. My sister and I received a message from the advisor after he died saying the RMD payment he had made was short $214. So my sister and I each made an RMD distribution for half that amount from the Inherited IRA's.
Since neither my sister nor I am subject to RMD's yet, we aren't required to take RMD from the Inherited IRA's yet. I am taking distributions up to the top of the 24% tax bracket in order to reduce RMD's in the future and move all the Inherited IRA by 2033.

 

[cathy63]

... Since neither my sister nor I am subject to RMD's yet, we aren't required to take RMD from the Inherited IRA's yet...

That might change. The IRS' reading of the current law is that since the person you inherited the IRA from was required to take RMDs, you and your sister are also required to take RMDs based on your own ages at the time of inheritance and also empty the account in 10 years. Congress left the old RMD provisions in place and didn't clearly state that the 10-year rule supersedes them, so in the IRS' eyes, both requirements apply to inherited IRAs. They have proposed rules that would clarify the requirement to take RMDs, but those are not finalized and the IRS will not enforce penalties for having failed to take the RMDs until at least next year.

In any case, if you're maxing out your 24% bracket, you're probably exceeding your RMDs and would be fine. You might want to warn your sister though, since if she's not taking money from the account now, she may have to take all the missed RMDs in the same year.