Disclaiming Inherited IRA

[Anonymous_]

@Tbsfca 

Is there an executor of the estate? 

If the first disclaimer by the sisters is effective and the IRA hits the estate for eventual distribution, the sisters will likely have to submit a disclaimer to the executor as they appear to be heirs.

[Tbsfca]

Thank  you, @Hal_Al.

However,  poster does ask:

Q.   If the Inherited IRAs go to the contingent beneficiaries or estate, that would we welcomed as long as the sisters aren't taxed on the Inherited IRAs as a distribution or as ordinary income. Would they be?

A.  Yes, either the estate will pay the income  tax on ordinary income or the heirs that receive the distribution will pay the income tax.  If somehow, the sisters are able to actually inherit the IRA, as a legal beneficiary (as opposed to taking a distribution from it thru the estate), then they will have 10 years to take distributions. So they could either spread the tax over 10 years or postpone taxation for up to 10 years.

The sisters (not the estate) have inherited the IRAs. The beneficiary designation was "To my descendants who survive me, per stirpes." The grandchildren are at tax brackets which would preserve more of the Grandfather's IRAs if they receive them as Inherited IRAs and take the distributions themselves over the 10 yr period (vs the sisters' tax brackets, possibly even with the 10 yr horizon). 

It's clear if this is considered a "qualified disclaimer", the Inherited IRAs pass to the grandchildren without tax implications to the sisters. The main question is whether there would be tax implications to the sisters if it is considered a non-qualified disclaimer since the grandchildren are beneficiaries by the "per stirpes" designation. Would there be?

Additionally, as you or others have said, it seems some of this is as much a legal question as a tax question. They should definitely get advice from their estate planning attorney - or an estate planning or tax attorney with specific experience in the area of disclaimers.

[Tbsfca]

Thank you, @Anonymous_ .

Re: Is there an executor of the estate? 

Yes, the surviving spouse (their Mom) is the executor of the estate. But that may not be relevant since it seems the Inherited IRAs would go to the grandchildren next because of the "To my descendants who survive me, per stirpes." beneficiary designation.

They would be fine (seems preferred) if it went to their Mom, but it doesn't seem that's how the beneficiary designation functions.

[Anonymous_]

@Tbsfca 

Preliminarily, the parties (sisters) need to inquire as to the exact basis for the rejection of the disclaimer by the IRA Custodian assuming the disclaimer was proper and timely filed.

If the Custodian is in error, then this entire issue would, seemingly, be resolved favorably. This is where it may be necessary to engage the services of a local attorney.

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@Tbsfca wrote:

They would be fine (seems preferred) if it went to their Mom, but it doesn't seem that's how the beneficiary designation functions.

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Correct. It would be descendants by right of representation. Their Mom would not be in that line of succession, obviously, unless everyone had predeceased her.

[Tbsfca]

Hi all,

I wanted to provide an update in case it helps anyone else. The sisters did consult with their parents' estate attorney.

As a matter of principle, the sisters are still going to dispute with the IRA Custodian because the IRA Custodian didn't process the original disclaimer request in a timely manner, which would have ensured it was considered 'qualified'.

However, even as a non-qualified disclaimer, the IRA Custodian confirmed they do not generate tax forms in doing a disclaimer, so the sisters (as disclaimants) are *not* taxed on the assets that are transferred to their kids. The IRA Custodian transfers the assets from the grandfather directly to the grandchildren (not the sisters).  The kids will file tax forms for the distributions when they take distributions. As per the 10 year rule of non-spousal inherited IRAs, the kids have 10 years to withdrawal all funds from these accounts. 

It's important to note the sisters never took control of their father's IRA accounts, which would have been a different story and likely would have resulted in a tax consequence to them if they had. 

From a filing perspective, the sisters will need to account for this 'gift over' as part of their annual gift tax allowance, or all at once as part of their lifetime gift tax exemption. In this case, the estate is well under any estate tax or generation-skipping tax (GST) limits, so that doesn't come into play.

I hope this summary helps someone else in a similar situation in the future. 

The question to ask the IRA Custodian in understanding any tax consequence of a non-qualified disclaimer is:
- will there be any tax forms generated as part of this disclaimer? (answer should be no). If so, which ones?