Inheritance question

[garyt]

Sadly my nephew's in laws both passed away from covid within 5 days of each other. His wife inherited their IRA. My question is how do they deal with the tax situation of the IRA?
When they file her parents final tax return can they cash out the IRA and pay the taxes on that return and be done with any tax issues?
They can inherit under a million dollars tax free, correct? They are well under that with the house and IRA, but I know the tax on the IRA will have to be paid somehow.
Thanks for any help.

[Car-Guy]

This link may help (or not)


https://www.schwab.com/ira/inherited...thdrawal-rules

[ivinsfan]

This is one of those questions where you ask an accountant.


I don't where you came up with the million dollar number either.
Probably to let him figure it out..

[PaunchyPirate]

Quote:

Originally Posted by garyt Sadly my nephew's in laws both passed away from covid within 5 days of each other. His wife inherited their IRA. My question is how do they deal with the tax situation of the IRA? When they file her parents final tax return can they cash out the IRA and pay the taxes on that return and be done with any tax issues? They can inherit under a million dollars tax free, correct? They are well under that with the house and IRA, but I know the tax on the IRA will have to be paid somehow. Thanks for any help.

IRAs are individually owned, not jointly. Even by a married couple. Are there more than one IRA(s)?

Are they Traditional or Roth IRA(s)?

We’re the deceased old enough to be taking RMDs from the IRA(s)? If so, those might need to be addressed if the full amount for the year had not yet been taken.

Before getting to the tax part, have they already figured out the mechanics of taking ownership of the IRA(s)? If there are multiple IRAs involved, they will need to process them correctly. Technically, when the first individual passed away, their IRA would pass to their named beneficiaries. Typically, this would be the surviving spouse. Since the spouse passed shortly afterwards, there probably wasn’t time to actually do that paperwork. They will need to work with the IRA holding company to sort thru this all.

I believe the inheritor would ultimately have 10 years from the death of the second individual to fully remove the funds. The taxes would be due at the time of the withdrawal. They withdrawal would be taxed at the recipients normal income rate.

Any other taxes due would be based on the inheritance tax laws of the state the deceased lived in. Rules vary. In my state there is no exemption on a million dollars as the OP refers to.

[garyt]

Quote:

Originally Posted by PaunchyPirate IRAs are individually owned, not jointly. Even by a married couple. Are there more than one IRA(s)? Are they Traditional or Roth IRA(s)? We’re the deceased old enough to be taking RMDs from the IRA(s)? If so, those might need to be addressed if the full amount for the year had not yet been taken. Before getting to the tax part, have they already figured out the mechanics of taking ownership of the IRA(s)? If there are multiple IRAs involved, they will need to process them correctly. Technically, when the first individual passed away, their IRA would pass to their named beneficiaries. Typically, this would be the surviving spouse. Since the spouse passed shortly afterwards, there probably wasn’t time to actually do that paperwork. They will need to work with the IRA holding company to sort thru this all. I believe the inheritor would ultimately have 10 years from the death of the second individual to fully remove the funds. The taxes would be due at the time of the withdrawal. They withdrawal would be taxed at the recipients normal income rate. Any other taxes due would be based on the inheritance tax laws of the state the deceased lived in. Rules vary. In my state there is no exemption on a million dollars as the OP refers to.

Thanks. I believe they are traditional IRA's and they were old enough to take distributions. They were told about the 10 years to withdraw the funds. I was wondering if there was a way to pay the taxes due at the parents lesser rate, since they were retired.

[PaunchyPirate]

Quote:

Originally Posted by garyt Thanks. I believe they are traditional IRA's and they were old enough to take distributions. They were told about the 10 years to withdraw the funds. I was wondering if there was a way to pay the taxes due at the parents lesser rate, since they were retired.

Unfortunately, I don’t think they can leverage the parents’ lower tax rate.

[cathy63]

Quote:

Originally Posted by garyt Sadly my nephew's in laws both passed away from covid within 5 days of each other. His wife inherited their IRA. My question is how do they deal with the tax situation of the IRA? When they file her parents final tax return can they cash out the IRA and pay the taxes on that return and be done with any tax issues?

Step 1 is for your niece-in-law to work with her parents' brokerage and figure out what kind of accounts she actually inherited. She'll need to provide the death certificates for both her parents and then the broker will set up inherited IRA account(s) for her and transfer the funds.

If she receives one or more Traditional IRAs, then she could cash them out and pay the taxes this year; or she could take the withdrawals any time in the next 10 years and pay the taxes as the accounts are depleted. She may also have to take her parents' RMD's for this year. All the tax on the money in these accounts will be paid via your niece-in-law's tax return, which is presumably a joint return with your nephew. There is no way to shift the tax to the parents' estate unless the estate or a trust was named as the beneficiary of the IRAs, which would be unusual and doesn't seem likely in this situation.

If she receives Roth IRAs, then she has 10 years to empty them and no taxes are due.

Quote:

They can inherit under a million dollars tax free, correct? They are well under that with the house and IRA, but I know the tax on the IRA will have to be paid somehow. Thanks for any help.

The Federal estate tax only kicks in on estates greater than $11.6M per individual, so that's not an issue here. Their state or the decedents' state may have an estate tax or inheritance tax set at a lower level though, so they should check into that.

[garyt]

Quote:

Originally Posted by PaunchyPirate Unfortunately, I don’t think they can leverage the parents’ lower tax rate.

thanks

[garyt]

Quote:

Originally Posted by cathy63 Step 1 is for your niece-in-law to work with her parents' brokerage and figure out what kind of accounts she actually inherited. She'll need to provide the death certificates for both her parents and then the broker will set up inherited IRA account(s) for her and transfer the funds. If she receives one or more Traditional IRAs, then she could cash them out and pay the taxes this year; or she could take the withdrawals any time in the next 10 years and pay the taxes as the accounts are depleted. She may also have to take her parents' RMD's for this year. All the tax on the money in these accounts will be paid via your niece-in-law's tax return, which is presumably a joint return with your nephew. There is no way to shift the tax to the parents' estate unless the estate or a trust was named as the beneficiary of the IRAs, which would be unusual and doesn't seem likely in this situation. If she receives Roth IRAs, then she has 10 years to empty them and no taxes are due. The Federal estate tax only kicks in on estates greater than $11.6M per individual, so that's not an issue here. Their state or the decedents' state may have an estate tax or inheritance tax set at a lower level though, so they should check into that.

Thank you

[DireWolf]

I have a related question. Spouses surviving parent recently passed away, and had not updated the beneficiary on the IRA after the other parent passed. RMD had not yet been taken for the year. My spouse and her sister are the only heirs listed on the will. I’m trying to figure out how the RMD will work for the year and it isn’t clear to me. Would be great if the estate took the RMD and paid taxes, and then at the end of all this process the remaining IRA is then split in half.

[Car-Guy]

Quote:

Originally Posted by DireWolf Spouses surviving parent recently passed away, and had not updated the beneficiary on the IRA after the other parent passed.

This reminds me... I setup my beneficiaries (to be my DW) decades ago... Anytime I move, add or change any account I'm always sure to setup her up as my beneficiary.... (Or POD) One of the "financial institutions" I deal with upgraded their systems and website this summer.... I don't log on to this system very often but when I tried a few weeks ago, I was notified of the upgrade and that I needed to "re-register"... So to be sure this wasn't some sort of malicious trick, I called the main office and they verified that everyone did need to re-register... (Sure sounds like someone screwed something up with the systems upgrade) Anyway, I re-registered (easy process) and logged on.... Everything looked ok but I happened check the beneficiary page while I was logged on... Yep, you guessed it... (it was blank) Updated the info and all "seems" well....

So now I have a new task to do periodically... Check the beneficiary pages on all my accounts once a year or so... Can't trust anything these days..... I would have thought they would have sent a notice to their members to let them know about the need to re-register and check/verify their personal info.... Silly me.

[SecondCor521]

Quote:

Originally Posted by DireWolf I have a related question. Spouses surviving parent recently passed away, and had not updated the beneficiary on the IRA after the other parent passed. RMD had not yet been taken for the year. My spouse and her sister are the only heirs listed on the will. I’m trying to figure out how the RMD will work for the year and it isn’t clear to me. Would be great if the estate took the RMD and paid taxes, and then at the end of all this process the remaining IRA is then split in half.

Generally speaking:

If the first-deceased spouse was one of several primary beneficiaries, then the IRA would go to the other beneficiaries.

If the first-deceased spouse was the only primary beneficiary, and contingent or secondary beneficiaries were named, then the IRA would go to the secondary beneficiaries.

If the first-deceased spouse was the only primary beneficiary and no other beneficiaries were named, then there is usually language in the custodial agreement that the IRA goes to the estate of the second-to-die spouse. Then the terms of the will would control what happened.

As far as the RMD, your spouse and your sister are collectively required to take the (remainder of the) second-to-die spouse's RMD for this year before 12/31 and it will be taxable income on your and your SIL's tax returns. You can take the RMD in any proportion you agree to. I'm not sure what happens if the two of them can't agree - maybe it is in proportion to the distribution of the IRA (so 50/50 it sounds like in this case).

If your spouse and sister don't take the RMD this year, then there is a 50% penalty on the amount that should have been distributed but wasn't.

[gauss]

Quote:

Originally Posted by DireWolf I have a related question. Spouses surviving parent recently passed away, and had not updated the beneficiary on the IRA after the other parent passed. RMD had not yet been taken for the year. My spouse and her sister are the only heirs listed on the will. I’m trying to figure out how the RMD will work for the year and it isn’t clear to me. Would be great if the estate took the RMD and paid taxes, and then at the end of all this process the remaining IRA is then split in half.

Watch out what you wish for. The estate income tax rate (not to be confused with estate tax rates) are quite high compared to individual tax rates.

In our case, we plan to have the estate take a distribution, but then make an offsetting distribution to the recipients in the same tax year so that the estate does not end up paying large taxes. I believe that the estate would 1099-R and/or K1 the recipients accordingly to accomplish this tactic. The estate would also need to file IRS form 1041 (estate income tax return). Hopefully cathy63 will way in on this also.

Has an executor/personal representative been named by the probate court yet?

-gauss

[DireWolf]

My wife is the executor. She’s just started all that stuff, and at this point all I really know is no RMD payment this year yet, and no living beneficiary on the account. The account isn’t that big, so RMD isn’t all that much. If we only are adding half that to our income this year, it isn’t that big a deal. Adding the whole thing would push us out of our ACA sweet spot(*)

(*) and maybe that isn’t that big a deal. The subsidy amount difference is not the concern, but if I was subject to the new max OOP, it ends up being more than the RMD. I *think* I still keep the original OOP, but have not ever dealt with that before.

[SecondCor521]

Quote:

Originally Posted by gauss Watch out what you wish for. The estate income tax rate (not to be confused with estate tax rates) are quite high compared to individual tax rates.

Correct.

Quote:

Originally Posted by gauss In our case, we plan to have the estate take a distribution, but then make an offsetting distribution to the recipients in the same tax year so that the estate does not end up paying large taxes. I believe that the estate would 1099-R and/or K1 the recipients accordingly to accomplish this tactic. The estate would also need to file IRS form 1041 (estate income tax return). Hopefully cathy63 will way in on this also.

I don't think the estate can take the RMD.

In the case of trusts, if they take a distribution they can pass it through to the trust beneficiaries on a K-1. And yes, in that case the trust would file a 1041 showing the income then taking a deduction for the distribution.

Quote:

Originally Posted by DireWolf (*) and maybe that isn’t that big a deal. The subsidy amount difference is not the concern, but if I was subject to the new max OOP, it ends up being more than the RMD. I *think* I still keep the original OOP, but have not ever dealt with that before.

You would keep the original OOP unless you updated your estimated income with your marketplace and that new estimate moved you into a higher CSR "bracket". These "brackets" are at 150%, 200%, and 250% of FPL.