How to minimize taxes on inherited IRA?

[Scratchy]

If he took money out after her death, that ought to count toward the 2021 RMD regardless of why he did it or what he did with the money. The problem is he took that money out illegally as he had no legal right to access the account.

It would be nice to tie up this loose end by crediting the amount withdrawn after the date of death to the decedent's RMD under the decedent's SSN but I strongly doubt the custodian would be permitted to report it this way under IRS rules.

Perhaps the custodian could report the after date of death withdrawals as proportionate distributions to the beneficiaries which would then count toward their respective shares of the year of death RMD. The corresponding accounts should then be returned from the estate to the beneficiaries individually. That would make them whole in all respects.

At any rate, I would ask whoever withdrew the money to consult with an attorney as to the proper way to rectify this.

 

[disneysteve]

He’s been managing her money for years as her health declined. Not sure if that matters, but I don’t think it was out of the ordinary for him to withdraw money to cover her expenses.

Now, that money became other people’s money the minute she died, so I get what you’re saying. Technically, sounds like it was illegal. Assuming he took the RMD to pay for expenses and prevent the rest of us from paying penalties with such short time left in the year, I don’t think there were ill intentions.

Family matters aren’t always black and white, even if the law is.

For sure. I in no way meant to imply that he did it on purpose. Handling an estate is complicated, as I learned this year. It's very easy to screw things up without realizing it. We also wondered how people do it if they can't afford to pay expenses out of pocket like we could. You can't legally access estate money so how do you pay for the funeral and stuff?

 

[cathy63]

You’re saying I may owe taxes on the money he withdrew after she died? Even though I never touched it?

I guess the RMD had to happen either way and if it didn’t happen before her death, then it would likely be split evenly among all of us - meaning I’d be paying taxes anyways?

If the first part is true - that sucks. Seems like her money should be able to be withdrawn to pay for her final expenses, and be taxed at her rate. Crazy that a portion may be assigned to me and taxed at my rate which is much higher than hers.

Yes, you could be paying taxes on money you never touched. Yes, the RMD was going to happen anyway. If it had happend after the account was distributed, then the Uncle could have just asked your wife to contribute to the funeral expenses and the net effect would have been the same.

 

[disneysteve]

At any rate, I would ask whoever withdrew the money to consult with an attorney as to the proper way to rectify this.

The attorney handling the estate should definitely be weighing in on this. He or she may not even know that the uncle took out that money. When I started the process of settling my cousin's estate, the very first thing the attorney said was to not touch any of the money in any accounts. All accounts should get frozen upon death.