Missed RMD Where IRA Owner and Spouse Beneficiary Both Passed Away in Same Year

[poorchip]

My father-in-law was the owner of a traditional IRA that he had been taking RMDs from. He passed away in June 2021, at the age of 96, prior to withdrawing the RMD for 2021. His spouse (my mother-in-law), the beneficiary of the IRA, passed away in Sept 2021, at the age of 82, unaware that the IRA existed. My wife, the executor of my mother-in-law's estate, first learned of the IRA's existence in Mar 2022. Upon learning of the IRA, my wife contacted the IRA custodian, and processed a distribution to claim the IRA on behalf of my mother-in-law's estate. My mother-in-law's estate is now listed as the IRA owner. Prior to distributing this IRA to the estate beneficiaries in the form of inherited IRAs, she thinks she needs to satisfy the missed 2021 RMD. Is an RMD required in this situation, how is the amount calculated, where is the distribution reported, and who pays the tax on the distribution?

[fanfare]

you really should have asked the questions before any action was taken.

@poorchip 

[Opus 17]

paging @dmertz 

[fanfare]

The answer to your question about your situation is on Page 9 left column,

in IRS Publication 590-B Distributions from (IRAs) for 2021

@poorchip 

[Opus 17]

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@fanfare wrote:

The answer to your question about your situation is on Page 9 left column,

in IRS Publication 590-B Distributions from (IRAs) for 2021

@poorchip 

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that's a pretty attenuated answer for a complicated question.

@poorchip 

I am going to assume here that we can ignore the transfer of the IRA from the husband to the wife, since they occurred in the same year, and neither person took their RMD.  If that is not a correct assumption, someone will have to correct me.

I'm also not clear on the effect of placing the IRA in the name of the estate instead of your wife as beneficiary.  Possibly, the father-in-law designated his wife as beneficiary but she never designated a new beneficiary so the IRA went to the estate.  That may have significant legal complications.  It probably means that the estate must be probated before your wife can access the funds.  It also means the IRA must be shared with any other heirs according to the terms of her mother's will, or the state's intestacy laws if there is no will.  Also, if the beneficiary of the IRA is an estate, rather than a person, the IRA must be cashed out within 5 years, not 10 years.  Nor can your wife roll over the money into her own IRA.  It must be spent, cashed out, and the taxes paid—although she can choose to do it all at once or spread out over 5 years.

First, of course, is the issue of the mother's RMD.  Since the beneficiary of the IRA is the estate, then I believe (but I am not certain) that the estate must take the RMD and pay the income tax, if any.  The estate may then forward the proceeds to the heirs under the terms of the will.  The estate is also subject to the penalty for not taking the RMD, which is 50% of the amount of the missed withdrawal.  

I really want to send you to a professional.  There are people here with better advice than me, but a professional in your area would be even better.  What I think needs to happen is for the estate to take a withdrawal ASAP, then file an estate tax return reporting the withdrawal as income, also reporting the missed RMD (which was due December 31) and ask for a waiver of the missed RMD penalty on form 5329 for cause (confusion, bereavement, etc.).  (When asking for the waiver, be sure to mention the withdrawal was taken as soon as you discovered the mistake.) Then the estate must take further withdrawals over the next 5 years to cash out the account and pay any income tax owed on the money on further estate tax returns.  The estate could cash out all at once, or spread it out, depending on her financial and tax situation.

I believe it is also possible for the IRA (which is currently an inherited IRA in the name of the estate) to be directly transferred to an inherited IRA in the name of the daughter.  It will still be considered an inherited IRA and still must be cashed out within 5 years, and can't be mingled with your wife's other retirement accounts.  Immediately after the transfer, the daughter would take the missed RMD.  The daughter files an amended 2021 tax return reporting the missed RMD on form 5329, and asks for a waiver of the penalty for cause.  (In fact, since this change—reporting the penalty while asking for a waiver—results in no tax owed, and because form 5329 has its own signature line, form 5329 for 2021 can be filed on paper without actually filing an entire amended return.).  Your wife will get a 1099-R for the withdrawal that will be reported as taxable income on her 2022 tax return.  Then, she has about 4 more years to close out the account.

But I hope one of my colleagues comes along to review my answer

@dmertz 

@macuser_22 

[NCperson]

@poorchip - maybe I missed whether this part was answered: 

<<Is an RMD required in this situation, how is the amount calculated, where is the distribution reported, and who pays the tax on the distribution?>>

1) the 2021 RMD was required and is based on the IRA owner's situation (your father in law). 

Take the balance of the IRA as of Dec 31, 2020 and divide by the factor in the table in the link below.  Use the BLUE column as that was in effect in 2021. 

Look up your father-in-laws age as of his birthday in 2021, even if he died prior to his birthday. 

So the number you are going to divide by is going to be 8.1 or 7.6 (96 or 97 years old) depending on his age on his 2021 birthday.  That result is the required minimum distribution from 2021.

https://static.fmgsuite.com/media/documents/62a03f4e-4470-466d-ab38-c2d1850bfc7d.pdf

2) that amount needs to be distributed from the IRA in 2022 to the Estate as it is the beneficial owner of the IRA and pay any tax required.  Follow @Opus 17 's advise as he makes some very valid points.

3) there is also a 2022 distribution required separate from the 2021 catch-up distribution. 

[Opus 17 · Accepted solution]

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@NCperson wrote:

@poorchip - maybe I missed whether this part was answered: 

<<Is an RMD required in this situation, how is the amount calculated, where is the distribution reported, and who pays the tax on the distribution?>>

1) the 2021 RMD was required and is based on the IRA owner's situation (your father in law). 

Take the balance of the IRA as of Dec 31, 2020 and divide by the factor in the table in the link below.  Use the BLUE column as that was in effect in 2021. 

Look up your father-in-laws age as of his birthday in 2021, even if he died prior to his birthday. 

So the number you are going to divide by is going to be 8.1 or 7.6 (96 or 97 years old) depending on his age on his 2021 birthday.  That result is the required minimum distribution from 2021.

https://static.fmgsuite.com/media/documents/62a03f4e-4470-466d-ab38-c2d1850bfc7d.pdf

2) that amount needs to be distributed from the IRA in 2022 to the Estate as it is the beneficial owner of the IRA and pay any tax required.  Follow @Opus 17 's advise as he makes some very valid points.

3) there is also a 2022 distribution required separate from the 2021 catch-up distribution. 

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I hate to nitpick and disagree, but if my general interpretation is correct, then:

1. The father-in-law's RMD is calculated differently because, at the time of his death, his sole beneficiary was his spouse who was more than 10 years younger than he was.  Follow the instructions on page 8 of this PDF that start with "Sole beneficiary spouse who is more than 10 years younger."

https://www.irs.gov/pub/irs-pdf/p590b.pdf

3. Neither the estate nor the wife (if the IRA is transferred to the wife as beneficiary) has an RMD for 2022.  Once the owner has died and because the first beneficiary was the estate, it follows the 5 year rule.  There is no annual RMD, but the entire balance must be distributed by December 31 of the year containing the 5th anniversary of the death of the original owner.  The corrective RMD that must be taken is the one that was required of the father-in-law while he was alive in 2021.  The mother did not have a separate RMD in 2021.  And after the mother died, the 5 year rule applies to the estate. 

[dmertz · Accepted solution]

What do you mean by "processed a distribution to claim the IRA on behalf of my mother-in-law's estate?"  An inherited IRA is not permitted to be moved by distribution and rollover.  Do you mean that your father-in-law's IRA was moved by trustee-to-trustee transfer to an IRA for the benefit of your mother-in-law's estate?

Assuming that the IRA was moved to your mother-in-law's by a proper trustee-to-trustee transfer, I suspect that your father-in-law's year of death RMD can be taken by the estate of your mother-in-law (likely with this income to the estate passing to the same beneficiaries of your mother-in-law's estate as would the inherited IRA) before transfer of the remainder to the beneficiaries of your mother-in-law's estate, or the year of death RMD could be taken by these beneficiaries after transfer of to inherited IRAs for the benefit of these beneficiaries.  The IRS is appears to be mainly interested in seeing that the year-of-death RMD is taken.  If the beneficiaries of the estate want to realize the income from your father-in-law's year-of-death RMD in different proportions than they would from distributions of that income from your mother-in-law's estate, the year-of-death RMD would have to be completed after transfer of the inherited IRA to their separate inherited IRAs.  If the estate receives the year-of-death RMD, that likely means that the estate will need to file and estate income tax return, Form 1041 (which may or may not already be required for other income to the estate).

The beneficiaries of your mother-in-law's estate are successor beneficiaries, subject to the 10-year rule.  Because your father-in-law died after is required beginning date for RMDs, according to the proposed IRS regulations they would also be subject to annual RMDs.  I'm not sure if those are based on the beneficiaries' separate life expectancies (assuming that the IRA is split and transferred from your mother-in-law's estate to separate IRAs for the benefit of the beneficiaries of your mother-in-law's estate by the end of 2022) or on your mother-in-law's life expectancy, but I think the latter.  (Taking them based on your mother-in-law's life expectancy would certainly be sufficient assuming that the estate beneficiaries are younger.)  We are still awaiting the final regulations from the IRS.  The beneficiaries of your mother-in-law's estate (or the estate itself if the inherited IRA is not transferred to beneficiaries) must also complete your mother-in-law's beneficiary RMD by the end of 2022.

Form 5329 requesting waiver of the 50% excess accumulation penalty needs to be filed by whatever entity (or entities) receives this distribution.

[poorchip]

@Opus 17 @dmertz @NCperson @fanfare 

Thanks so much for the responses. I believe Opus 17 and dmertz tied for best answer, but everyone who responded raised valid points. For the record, here is how we are going to approach this:  Immediately process a distribution from the IRA, payable to my mother-in-law's estate, in the amount of the 2021 missed RMD. The missed RMD is calculated based on my father-in-law's age on his 2021 birthday (even though he had passed prior), and table II of Publication 590-B is used to derive the LE factor due to his spouse being more than 10 years younger. That distribution will be reported on my mother-in-law's estate's 2022 form 1041, which is already required because of other probate action. A waiver of the missed RMD penalty will be requested with that return. The estate will pay tax on the distribution (which I understand to be 37% on estate income exceeding $13,050--which is why you should generally avoid having an estate be the beneficiary of an IRA). Upon completion of that distribution, the balance of the IRA will then be distributed to the estate beneficiaries in the form of inherited IRAs. 2022 and future RMDs will be the responsibility of the inherited IRA beneficiaries. 

I should point out that neither the estate accountant, estate attorney, nor the IRA custodian gave accurate advice on how to handle this situation, so "executor beware". The accountant believed my mother-in-law owed an RMD based on her LE, and the custodian went so far as to say that, because my mother-in-law had not taken ownership of the IRA in 2021, her liability was zero and no RMD was required (wrong!). The advice I received here was spot on, I was able to validate this approach against the IRS instructions and feel confident that this is the most correct action to take. Thanks again.

[Opus 17]

@poorchip

Your plan seems sound.

I should point out that I said your wife would have to follow the 5 year rule regarding her inherited IRA, while @dmertz indicated the 10 year rule.  I think dmertz is probably correct, and they certainly have a higher level of knowledge than I do, and I am struggling to get through that section of publication 590-B.  However, the 10 year rule as I understand it says the balance must be withdrawn before the end of 10 years but there is no RMD in the mean time.  dmertz indicates there are pending new regulations that would require annual RMDs in addition to the requirement to distribute the entire amount by the end of 10 years.  I don't see such a requirement in the current version of publication 590-B, but I might be missing something.   Remember that the immediate distribution counts for 2021, so if an RMD is needed in 2022 from the inherited IRA, it also has to be taken before Dec 31.  If you would prefer to not take a distribution, check back here in November for an update on the regulatory situation.

[dmertz]

Make sure that  you are using the correct life expectancy factor for the 2021 RMD.  The current 2021 IRS Pub 590-B has the tables to be used only for 2022 and beyond. Use Table II from the 2020 IRS Pub 590-B:  https://www.irs.gov/pub/irs-prior/p590b--2020.pdf

The estate normally passes the income through to the estate beneficiaries on Schedules K-1 (Form 1041) for taxation on the beneficiaries' individual tax returns instead of being taxed at the estate tax rates.

The current IRS Pub 590-B does not incorporate the proposed regulations.  They won't update Pub 590-B until the new regulations become final.  Beneficiaries generally would not want to wait until year 10 to take the entire balance and spike their income into a higher tax bracket, so taking annual amounts generally makes sense anyway.

[fanfare]

@dmertz The table in the "for 2021" version applies to 2021 tax returns, not returns starting with 2022.

[dmertz]

@fanfare 

Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions

https://www.govinfo.gov/content/pkg/FR-2020-11-12/pdf/2020-24723.pdf

"Applicability Date: The final regulations in this document apply to distribution calendar years (as defined in § 1.401(a)(9)–5, Q&A–1(b)), beginning on or after January 1, 2022."

The IRS updated 2021 Pub 590-B in March and April 2022 and seems to have mistakenly changed the tables or perhaps everyone had already done their 2021 calculations using the old tables.  As indicated in numerous places in the final regulations, the new tables only apply to 2022 and beyond.

[Edit] It seems that the replacement of the tables in the 2021 Pub 590-B was intentional.  The first paragraph of Pub 590-B says:

"Life expectancy tables updated. The life expectancy tables in Appendix B have been updated to reflect the new life expectancy and distribution period tables in the updated regulations in section 1.401(a)(9)-9 applicable to distribution calendar years beginning on or after January 1, 2022. For more information, see Revised life expectancy tables for 2022."

[fanfare]

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@dmertz 

[fanfare]

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@dmertz