Step up basis for parents who died month apart

[MuirWannabe]

My FIL passed and then MIL passed barely 3 weeks later. They have a joint account and each have their own separate TIRA accounts. There was obviously no time for MIL to have filed anything after FIL passing before she herself passed.

Anyone understand how step up works in this scenario? Did assets all pass to MIL by definition (she was 100% first primary beneficiary). And now their 3 children are each a third beneficiaries. Is the step up basis based on date of MIL’s death for all the accounts?

Separate question also. Is RMD’s for both their TIRA accounts required in year of death? My research says yes they are. But the RMD’s are not done by the estate but rather are done by the 3 heirs since the account is theirs by definition. Taxes are paid out by heirs. And then the 10 year depletion rule kicks in. Is this correct?

We are very fortunate to be inheriting a significant amount of money. But I’ve got a feeling my taxes just became exponentially more complicated. Especially as I consider my ongoing Roth conversion strategy for my own TIRA as I will also have to create a depletion strategy for the large inherited IRA’s.

Appreciate any insight y’all may have!

Muir

 

[RunningBum]

Is there a survivorship period specified in his will? If not, apparently state law takes effect. See https://www.alllaw.com/articles/nolo/wills-trusts/beneficiary-has-died.html

Were the kids his alternate beneficiaries as well? If so, the question seems moot. The kids get it one way or another.

Yes, the beneficiaries must take the RMDs that were due if the deceased did not take it this year. https://www.irahelp.com/slottreport/who-must-take-year-death-rmd

Not sure why your taxes become so much more complicated. You just change your strategy to convert at a higher tax bracket. Or maybe you don't convert yours at all for the next 10 years while you withdraw from the inherited IRAs. It does raise yet another benefit to converting your own tIRAs as early as you feasibly can, if you have a large inheritance coming.

 

[GalaxyBoy]

Sorry for your losses.

To answer the question some clarifications. Were each of them over age 72? I assume you mean that the accounts were transfer on death? Did either of them take their RMD in the year of death?

I’m not sure the step up in basis is really relevant for the IRAs, but would matter for a taxable account. I guess over three weeks it might not be significant. Other, more knowledgeable folks can step in to answer that.

 

[Bamaman]

Unfortunately you're going through a situation that's not that much out of the ordinary.
You'll want to contact an attorney on this one.

Sometimes the parents are in a lower tax bracket, and beneficiary heirs would net out more funds if their RMD's are done in the year of their death--before funds transfer to the beneficiaries and they have to do RMD's. Can someone that's deceased have their RMD's for the year done after their death? And then funds disbursed to the heirs?

Inherited RMD's with 50% penalties are also something to be very careful on. And 10 years that inherited RMDs have to be withdrawn in can kick the heirs up in tax brackets too.

 

[pb4uski]

My FIL passed and then MIL passed barely 3 weeks later. They have a joint account and each have their own separate TIRA accounts. There was obviously no time for MIL to have filed anything after FIL passing before she herself passed.

Anyone understand how step up works in this scenario? Did assets all pass to MIL by definition (she was 100% first primary beneficiary). And now their 3 children are each a third beneficiaries. Is the step up basis based on date of MIL’s death for all the accounts?

Separate question also. Is RMD’s for both their TIRA accounts required in year of death? My research says yes they are. But the RMD’s are not done by the estate but rather are done by the 3 heirs since the account is theirs by definition. Taxes are paid out by heirs. And then the 10 year depletion rule kicks in. Is this correct?

We are very fortunate to be inheriting a significant amount of money. But I’ve got a feeling my taxes just became exponentially more complicated. Especially as I consider my ongoing Roth conversion strategy for my own TIRA as I will also have to create a depletion strategy for the large inherited IRA’s.

Appreciate any insight y’all may have!

Muir

First and foremost, sorry for your losses.... 3 weeks apart is a gut punch.

There is no step-up in basis for tIRA accounts... only taxable accounts and property. For taxable accounts and property the step-up in basis would the value on MIL's date of death. Technically, MIL would have got a stepped-up basis at FIL's date of death for either all or half of the joint account assets and the then beneficiaries of the joint account would get a stepped-up basis at MIL date of death. But if there were no sales of securities in the joint account in the 3 weeks between their death then it is a bit of a moot point.

Typically for a tIRA, a spouse would be the primary beneficiary and their children would be secondary beneficiaries.... assuming that is how your in-laws accounts were set up, your MIL would be the beneficiary of your FIL's tIRA and her children would be the beneficiary of your MIL's tIRA and the tIRA that your MIL "inherited" from your FIL. But you need to check the beneficiary designations for each account to see what they really were.

It looks like you got the last part on RMDs right.

If the year-of-death RMD was not already taken by the IRA owner, it must be taken by the beneficiary. It is not paid to the IRA owner’s estate, unless the estate is named as the beneficiary.

https://www.irahelp.com/slottreport/who-must-take-year-death-rmd

 

[MuirWannabe]

Thanks everyone for your condolences, it has been tough for DW especially.

To clarify some things:

MIL was primary beneficiary on accounts. The contingent beneficiaries were the 3 children at a third each.

I do realize step up basis only applies to the joint after tax account. Guess I was just combining like 3 different questions into one post on the subject.

 

[MuirWannabe]

Is there a survivorship period specified in his will? If not, apparently state law takes effect. See https://www.alllaw.com/articles/nolo/wills-trusts/beneficiary-has-died.html

Were the kids his alternate beneficiaries as well? If so, the question seems moot. The kids get it one way or another.

Yes, the beneficiaries must take the RMDs that were due if the deceased did not take it this year. https://www.irahelp.com/slottreport/who-must-take-year-death-rmd

Not sure why your taxes become so much more complicated. You just change your strategy to convert at a higher tax bracket. Or maybe you don't convert yours at all for the next 10 years while you withdraw from the inherited IRAs. It does raise yet another benefit to converting your own tIRAs as early as you feasibly can, if you have a large inheritance coming.

I have to confirm, but don’t believe a survivorship period was in the will.
Yes, the kids were each a third contingent beneficiary.

Hope you’re right about tax considerations. As you say, maybe I’ll just have to Roth convert to a higher tax bracket. And probably focus on the inherited IRA since it’s got to be depleted in 10 years anyway. Either way, my taxes are going up. A fortunate issue to have I suppose.

 

[MuirWannabe]

Sorry for your losses.

To answer the question some clarifications. Were each of them over age 72? I assume you mean that the accounts were transfer on death? Did either of them take their RMD in the year of death?

I’m not sure the step up in basis is really relevant for the IRAs, but would matter for a taxable account. I guess over three weeks it might not be significant. Other, more knowledgeable folks can step in to answer that.

Yes, they were both in their 80’s. I must confirm, but don’t think either had taken a 2021 RMD.

 

[pacergal]

My condolences to you and your wife.

 

[MuirWannabe]

Unfortunately you're going through a situation that's not that much out of the ordinary.
You'll want to contact an attorney on this one.

Sometimes the parents are in a lower tax bracket, and beneficiary heirs would net out more funds if their RMD's are done in the year of their death--before funds transfer to the beneficiaries and they have to do RMD's. Can someone that's deceased have their RMD's for the year done after their death? And then funds disbursed to the heirs?

Inherited RMD's with 50% penalties are also something to be very careful on. And 10 years that inherited RMDs have to be withdrawn in can kick the heirs up in tax brackets too.

They were in a lower tax bracket. But I’m pretty sure I’ve got to take their RMD for this year. So it is will apply in my tax bracket.

Not sure what you are referencing with 50% penalties on inherited RMD’s! Can you elaborate cause that gets my attention?

 

[MuirWannabe]

First and foremost, sorry for your losses.... 3 weeks apart is a gut punch.

There is no step-up in basis for tIRA accounts... only taxable accounts and property. For taxable accounts and property the step-up in basis would the value on MIL's date of death. Technically, MIL would have got a stepped-up basis at FIL's date of death for either all or half of the joint account assets and the then beneficiaries of the joint account would get a stepped-up basis at MIL date of death. But if there were no sales of securities in the joint account in the 3 weeks between their death then it is a bit of a moot point.

Typically for a tIRA, a spouse would be the primary beneficiary and their children would be secondary beneficiaries.... assuming that is how your in-laws accounts were set up, your MIL would be the beneficiary of your FIL's tIRA and her children would be the beneficiary of your MIL's tIRA and the tIRA that your MIL "inherited" from your FIL. But you need to check the beneficiary designations for each account to see what they really were.

It looks like you got the last part on RMDs right.



https://www.irahelp.com/slottreport/who-must-take-year-death-rmd

Thanks. This is good clarification and fits our situation correctly I believe.

 

[cathy63]

I'm so sorry for your loss. I'm sure your spouse and the sibs are devastated, so having someone like you to help keep the finances straight will be a godsend.

You need to talk to the broker where the tIRAs are held. You will probably need to take at least one of the heirs with you when you have this conversation so that the broker knows they are authorized to discuss the accounts with you. If all sibs are not available locally, then there may be quite a bit of paperwork and possibly medallion signatures required in order to get the inheritances distributed.

I'm assuming that both accounts were setup such that the spouses were each others primary beneficiaries, and the children were equal contingent benficiaries. The broker can confirm this, and that should be the first thing they look into.

MIL's account is easy. The broker will open Inherited IRA accounts for each child and transfer one-third of the funds from MIL's account into each of the Inherited IRA accounts. At that point, the heirs should instruct the broker to distribute one-third of MIL's RMD from each account to themselves, making sure to inform the broker that it's a death distribution. The heirs will each receive a 1099-R with code 4 in box 7 next year, and they will report this distribution as ordinary taxable income. The heirs have to instruct the broker to make these distributions because the broker has no way to know whether MIL had other tIRAs from which she had already taken her RMD for the year, so it's not automatic. After the RMD is taken, the heirs can move the accounts to other custodians of their choice, but they will need to make sure that the receiving accounts are correctly titled as inherited IRAs.

FIL's account is more complex. If nobody notified the broker that he had passed before MIL and she didn't make any election for receiving the funds she inherited from him, then I think one of two things could happen. The broker will follow their policy, whatever it is, so you probably have no choice in the matter.

1) The broker might treat MIL as the legal heir and open an account for her, but this account would have no beneficiary, so it would revert to her estate. Theoretically, the estate could use her life expectancy for withdrawals, but then that means you can't close the estate. There's some info online about transferring IRAs left like this to Inherited IRAs, but not all brokerages will do it. See this article: https://www.wealthmanagement.com/es...state-inherited-iras-individual-beneficiaries

2) The broker could also treat FIL's account as if MIL predeceased him or as if she had disclaimed her inheritance from him. In that case, the children will end up with second inherited tIRAs directly from FIL and they'll go through the same RMD process as for MIL's account.​

On the tax issues --
Your spouse doesn't have to empty the accounts equally over 10 years. You can leave the money alone for 9 years and take it all in year 10 if you want to. So look at what happens to your taxes if you use an unequal distribution strategy. Also, look at what happens if you change your filing status to Married Filing Separately for a few years. Depending on where you live and the exact amounts in your own IRA vs the inherited IRA, this might be one of the few situations where MFS results in lower overall tax. Inheritances are separate property, but some community property states do treat income from separate property as community income. If you live in Idaho, Louisiana, Texas, or Wisconsin, you need to investigate whether income from an inherited IRA counts as community income or not (IRS Pub 555 should help). Anywhere else, it's definitely separate income.

 

[MuirWannabe]

Wow, thanks Cathy. That’s a bunch of information to digest. Appreciate you.

 

[N02L84ER]

Hope you’re right about tax considerations. As you say, maybe I’ll just have to Roth convert to a higher tax bracket. And probably focus on the inherited IRA since it’s got to be depleted in 10 years anyway.

I do not think you are allowed to Roth convert an inherited IRA.

 

[MuirWannabe]

I do not think you are allowed to Roth convert an inherited IRA.

Oh dang. Hope you’re wrong about this. I’ll have to research

 

[cathy63]

Oh dang. Hope you’re wrong about this. I’ll have to research

No, it's correct that you aren't allowed to convert a non-spousal inherited IRA to Roth.

 

[RetiredHappy]

Sorry for your loss. This random thought just came to mind. I don't have the answer but if your FIL/MIL's effective tax bracket was much lower than the 3 children's, does the law allow greater than RMD distribution within the same year after their death?

 

[MuirWannabe]

Yes, it looks to be correct that you can’t convert a non spousal inherited IRA distribution to Roth. That’s a bummer. I wonder why? Uncle Sam still gets his taxes either way.