Form 5329: Estate or Beneficiary (which one?)

[susanrs22]

In reviewing answers to similar questions, it appears that: if the deceased passed before the end of the year, it was not the deceased who "missed" the IRA RMD but rather the IRA beneficiaries' responsibility to take the deceased's calculated RMD for the year. Fine. But, there were 10 beneficiaries and in the mess/confusion at the end of the year, the 2019 RMD was short by a small amount, which was rectified a couple of days ago. It's not clear who files the 5329 to request a waiver of the penalty: If it had not been rectified, wouldn't it be the estate that owes the penalty, so shouldn't it be the estate? Other answers suggest it's the beneficiary, but which one out of the 10? Two beneficiaries took more than they had to; three beneficiaries haven't yet taken a distribution but the RMD has been met without them so surely they don't need to file for a penalty waiver just because they didn't take anything; maybe it's filed by the beneficiary who took the last distribution that allowed the RMD to be met??

[dmertz]

The IRS has never provided any specific guidance on this.  Your suggestion to have the beneficiary who received the distribution that completed the RMD be the one to file the Form 5329 requesting the waiver seems reasonable.

The estate has nothing to do with this unless the estate is a beneficiary of the IRA (and from the details it seems that the estate is not a beneficiary.  Unless the estate is a beneficiary, the estate has no responsibility to receive income from this IRA and no reason to file Form 5329 for this RMD shortfall.

[susanrs22]

Thank you for taking the time to reply. Correct: the estate is not a beneficiary. But from my reading of Kitces blog, if the beneficiaries never took the full RMD (e.g., never told the acct custodian which stock to sell from a brokerage IRA to raise the cash for the distribution), it would be the estate that owed the penalty. And that if the IRS pursued it after the estate was closed out, they'd come after the executor (hello). So, I'd prefer if I could file the 5329 with the 1041 to make it very clear that the estate is the one waived of the penalty, rather than hoping that some beneficiary in Timbuktu would actually file it and understand how to work with the IRS regarding any further communication. 

But, if the beneficiary proposed above filed the 5329, I can see at least 2 options for how to fill out lines 52-54 given the deceased's remaining 2019 RMD was, say, $10k, the other beneficiaries took $9.5k in 2019, and this beneficiary completed the RMD taking $1000 (more than was needed) in 2020. Option 1: line 52: $10k; line 53: $0 with an annotation that other beneficiaries took $9.5; line 54: $0 with the annotation "RC ($500)." Option 2: line 52: $500; line 53: $0; line 54: $0 with the annotation "RC ($500)." Thoughts? 

[dmertz]

"But from my reading of Kitces blog, if the beneficiaries never took the full RMD (e.g., never told the acct custodian which stock to sell from a brokerage IRA to raise the cash for the distribution), it would be the estate that owed the penalty."

It seems unlikely that Kitces would have said that since the account becomes maintained for the benefit of the beneficiaries upon the death of the participant and CFR § 1.401(a)(9)-5 Q&A 4 says that this must be distributed to "a beneficiary," implying that it is a beneficiary who fails to complete the RMD not the estate of the decedent.  If you can provide a link to the blog post, I'll read it.

It IRS does not seem to aggressively pursue missed RMDs, so an issue is only likely to come up if there is an audit and the audit would provide an opportunity to provide a complete explanation.  As long as it can be demonstrated that the remainder of the year-of-death RMD was eventually taken by "a beneficiary" and that there was at least some attempt to request the waiver, the IRS is likely to be satisfied.

Regarding your suggested preparation of Form 5329, I think I would do as you indicated in your second alternative with $500 on line 52, then provide full explanation in the explanation statement.

[susanrs22]

Excellent discussion, thank you.

Here is the link to the blog: https://www.kitces.com/blog/fix-rmd-missed-forgotten-miscalculated-corrective-action-form-5329-penal.... I'm referring to the very last section entitled, "Beneficiaries should take corrective action..." BUT, re-reading it with your comments in mind, I can see that section might be only referring to distributions the deceased was required to have made before death (e.g., for a prior year). 

Looking at the penultimate section, entitled, "Post-Death RMD shortfalls..." I don't actually see any discussion related to taking the decedent's post-death remaining RMD but rather only a discussion of non-spouse beneficiaries needing to take their RMD by the end of the year following the year of death. 

I'll take the approach discussed in this thread, and keep my fingers crossed that the beneficiary in question actually files what I provide, including the letter of explanation; certainly, it will be more motivation if it's not the estate who would owe the penalty. I am not certain which beneficiary would end up owing the penalty if this one doesn't file the 5329, as 3 beneficiaries took no distribution so it seems unfair for the penalty to land on the one beneficiary who finally made up the remaining RMD this week. BUT, as you observe, it is likely a rhetorical question. 

It has been a pleasure to talk with you. Thank you for taking the time. 

[dmertz]

Yes, I think your final conclusion regarding Jeffery Levine's article on kitcies.com is correct, that the section in question is referring to RMDs that were already late prior to the death of the decedent.  It took me a few times reading that section (particularly the title of that section) to realize that.

[susanrs22]

A final observation (no reply needed, I just need to post to make me feel wrapped-up). From our conversation herein, I've come to believe that there is an OPTION 3 for the example beneficiary's 5329 that is more consistent with all I've learned here.

See, if I had not misread the blog, I might have realized that the executor has no need to know what was distributed ('cuz the estate would not be on the hook for the penalty) and thus would not have requested the beneficiaries share the amount in their box 1 of their 1099R with me: in the absence of one beneficiary stepping up and telling the IRA custodian that they would like to take, say, 100% of the deceased's 2019 RMD, the IRA custodian simply assigned a distribution amount to each beneficiary proportionate to their IRA share and that's all any given beneficiary would know. In fact, the custodian likely wouldn't be able to tell the last 3 beneficiaries that they don't need to take a distribution because that would be passing along information about the other 7 beneficiaries that they aren't entitled to know. So, the fact that I know that the deceased's full RMD was not taken in 2019 , and by how much it was short, and that this particular beneficiary took [more than] the remaining amount of the deceased's 2019 RMD in 2020 is immaterial. 

As such, I believe that the beneficiary in question here should file the 5329 as follows: Line 52: $1k (his custodian-assigned distribution share and, incidentally, what he took in 2020); Line 53: $0; Line 54: $0 with the annotation "RC ($1000)." Note that this beneficiary would/should not know that the penalty waiver request is really only on $500 due to other beneficiaries having taken more than they needed to, so all this beneficiary can do is to request the waiver on the custodian-specified amount they didn't take in 2019. An audit, if it came to that, would surface the true 2019 short-fall.  

And, along those lines, the other beneficiaries who took no distribution in 2019 should take their distribution in 2020 and file their own 5329 in a similar fashion. I'm not going to take it upon myself [anymore] to advise them, because it is my understanding that the IRS really doesn't care that they didn't take their custodian-specified portion of the distribution but rather cares that the deceased's RMD is taken, and since I know that it [finally] was, it shouldn't matter if they file a 5329 or not. (Technically, they should; in reality, they needn't.)

Again, no reply needed here (unless you are horrified that I veered off course), and thank you so much. I feel like I now understand something in reasonable detail that I'll never need to know again.

[dmertz]

The custodian can only indicate the amount of a particular beneficiary's proportionate share of the the total RMD attributable to that particular IRA, but has know way of knowing how much actually needs to be taken from any particular beneficiary.  Because of the ability to aggregate IRA RMDs, it's the responsibility of the individual (or in this case, the beneficiaries) to determine what needs to be taken from any particular IRA.  This makes information from the custodian is somewhat meaningless.  But I think you are fine with whatever you decide to do since the full amount of the decedent's year-of-death RMD was ultimately distributed and a good-faith attempt to show that will have been made.