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Who bears the tax consequence of an RMD for 2010, the year of owners death?

I am a (1 of 7) non spouse beneficiary of an IRA that was in my mom's living trust.  She passed away in May of 2010 before taking the RMD.  The IRA custodian figured the RMD based on the her age (88 @ time of death) and sent the check(s) to me and my siblings.  The 1099-R I received shows the code 4 for death, but also shows the entire distribution is taxable to me.  The IRA was later divided into 7 'inherited IRA's" and designated as such in accordance with the beneficiary designation on the original IRA.

Why do I incur the tax consequence of the RMD?  Yes, I received it, but only because the owner was deceased and I am a named beneficiary.  Shouldn't the 1099-R be attributable to the owner on their final tax return?  The account number listed on the 1099-R is indeed the account number for the original IRA owner, not the account number for my inherited IRA.  I understand that I don't have to start my RMD until the year following the owners death (2011), so this seems even more logical that the RMD tax consequence stays with the owner for their final tax filing for 2010???
  • Did the executor create any estate accounts? If the IRA custodian paid you and your 6 fellows directly, and you can't find your answer in IRS pub 590, you need professional advice because that doesn't seem right.

    http://www.irs.gov/publications/p590/index.html
  • rlw53, I'm not sure I understand your question re the executor creating any estate accounts.  All of my mom's assets were in a "living trust", so as to avoid probate and ease the distribution of, well...everything.  I've read and re-read pub 590 and it just doesn't address this specific instance.  I will probably have the CPA's doing her return advise me on this, because I agree with you - it doesn't seem right.  Thanks for your input!
  • Generally when a person dies, the executor creates one or more accounts titled "The Estate of Jane Doe, Deceased." These are called estate accounts and are used to accumulate and disburse the assets of the estate. Sometimes an existing personal account can be converted to an estate account. Other times a new account is created for this purpose.

    The RMD should have been added to the estate and counted as income on the final tax return of the deceased. The IRS will expect to see a 1099-R with your mother's name on it. The cash, if that's how you chose to take your inheritance, would be tax-free to you. It's unclear from your post whether you received cash or an inherited IRA.

    The fact that the IRA was in your mother's trust at all strikes me as unusual. Generally, only assets subject to probate are placed in a revocable living trust. IRAs, which are payable-on-death accounts with defined beneficiaries, don't need to be inside of trusts because they pass outside of probate. I guess the IRA could be in the trust if your mother didn't designate any IRA beneficiaries other than her estate, but again, that would be somewhat unusual.

    There's enough going on here that you need a credentialed tax advisor. A CPA might not have enough tax expertise to figure this out.
  • Thanks for your assistance.  I contacted Deloitte since they are doing the final return for my mom and their answer is..."The rule is that if the IRA owner dies before receiving the MRD for that year, the MRD must be paid to the designated beneficiaries. If your mom’s trust (or estate) had been named the beneficiary, then the MRD would have been reportable by the trust (or estate). "  

    Not the answer I wanted, but there you go.  We individually pay the taxes at our rates.  How is it that the IRS always comes out on top?

    Thanks again!
The more I think about it, the more I'm coming to the conclusion that your accountant is correct.

A deceased person can't earn income after the date of death. So the RMD income couldn't go on her final personal 1040 (unless it was a joint return with a surviving spouse who inherited the IRA). A deceased person's estate can earn posthumous income, which is reported on a 1041.

But the IRA, as a payable-on-death account with designated beneficiaries, was never part of the estate. So you beneficiaries have income in respect of a decedent. The IRS doesn't care who pays the tax as long as it gets paid. Since it was too late for your mother to pay it, it was taxable to the beneficiaries.

Publication 559 covers this to some extent, but not in enough detail about your specific case to make it immediately obvious.

I learned something from this. Tomorrow, I'm going to pull the RMD from my 90-year-old mother's IRA. So thank you for reminding me that it's important to think about this stuff.
  • Thanks, rlw53 and windoww ...
      
    The quetion posed by windoww was of great interest to me.  I was glad to see the information you both exchanged.  It got me reading Pub 590 more closely.  It's hard to interpret what is right without knowing all the deep details of the instruments involved and the particular state involved. Generally, a living trust becomes irrevocable upon the grantor's death.  I certainly wouldn't challenge Deloitte (like I did when years ago D&T was our external auditor).  However I did find a couple of interesting things in Pub 590.
      
    I believe a lack of clarity results from an IRA being a federally-defined instrument, while a trust is a state-defined entity.  So much for federalism.
       
    Even if a trust is a "named" beneficiary, it cannot be a "designated" beneficiary of an IRA.  The beneficiaries of the trust become the "designated" beneficiaries.  So, the trust appears to become merely a pass-through vehicle for IRA's.  That makes sense, because the corpus of a trust cannot "own" an IRA.  Designated beneficiaries aren't finally established until September 30 of the year -after- the year of death (presumably to give beneficiaries sufficient time to disclaim, if desired).
      
    Assuming that windoww's mother passed after her "beginning date" for RMD's, yet before taking the RMD for her year of death, I believe the RMD: 1) should have been based on what her age would have been at the END of the year of her death, not her age at the time of death; and 2) should have been paid to "The Estate of [name]", and recorded as an RMD on the mother's final individual tax return.  Then, the assets remaining after the RMD should have been distributed to the beneficiaries as inherited IRA's according to the provisions of the trust as non-taxable inheritances.  The beneficiaries then would be required to begin taking their own RMD's in the year after the year the mother passed.
      
    Of course, that would leave the issue of the RMD paid to the estate.  The estate potentially would have to file its own estate tax return if the RMD it received was sufficiently large.  The executor also would have the repsonsibility to thereafter distribute (as non-taxable inheritances) the estate assets according to the provisions of a will, or in accord with state requirements.
      
    The government is happy.  The beneficiaries are happy.  Life is good.

    Anyway, just some thoughts to share.  Thanks again to you both.
  • Cal, your theory is what I also initially believed. I have come around 180 degrees from my original position because the decedent's tax year ends on the date of death. No more income, including the posthumous RMD, can accrue to the decedent. And the estate is not involved at all. That's why this ends up as "income in respect of a decedent" to the beneficiaries.

    All of this would be very different if there were a surviving spouse who inherited the IRA. I think I probably had that scenario in my head when I began replying to this very interesting question.