Inherited inherited IRA confusion.

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krow36
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Inherited inherited IRA confusion.

Post by krow36 »

My friend inherited an IRA from his mother. She had inherited the IRA from her husband. She did not assume the IRA as her own, but had it titled as an inherited IRA for her benefit. Unfortunately she put the inherited IRA into a trust and did not name a beneficiary to the IRA. She passed 10 years later and my friend and his brother were the beneficiaries of the trust. After considerable difficulty and delay, my friend was able to transfer his half of the inherited IRA to Vanguard.

Vanguard had difficulty determining the 2018 RMD, and different reps came up with 3 different RMDs. His father, the original owner, had started taking RMDs before he died. I don’t know if his mother used his age or her age for her RMDs and it’s possible they were the same age.

Doesn’t the lack of a designated beneficiary require the use of Table 1 and the father’s age in the year of death, reduced by 1 for each subsequent year? If he was 70 when he died 10 years ago in 2007, Table 1 says his Life Expectancy was 17.0 years at that time. Would the Dec 31, 2017 balance divided by 7 (17 - 10) give the 2018 RMD? And the inherited IRA can only last 6 more years?

I don’t understand how Vanguard reps could find 2 very different RMDs in this situation. My friend would like to know which of the Vanguard reps was correct? And if he owes more RMD for 2018??
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cheese_breath
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Re: Inherited inherited IRA confusion.

Post by cheese_breath »

krow36 wrote: Sun Apr 21, 2019 8:19 pm Unfortunately she put the inherited IRA into a trust and did not name a beneficiary to the IRA. She passed 10 years later and my friend and his brother were the beneficiaries of the trust.
Do you really mean she named the trust as the beneficiary of the IRA?
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krow36
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Re: Inherited inherited IRA confusion.

Post by krow36 »

She put the inherited IRA into the trust and neglected to name a beneficiary. :(
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cheese_breath
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Re: Inherited inherited IRA confusion.

Post by cheese_breath »

krow36 wrote: Sun Apr 21, 2019 8:44 pm She put the inherited IRA into the trust and neglected to name a beneficiary. :(
I'd like to know how she did that...

https://www.investopedia.com/ask/answer ... -trust.asp
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Mlm
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Re: Inherited inherited IRA confusion.

Post by Mlm »

Does your friend have access to his mothers prior tax returns? First I would want to determine if she was taking her proper RMD's. Then I would want to know if she took a RMD in the year of her death or if you friend needs to take it.

It does sound right that there would only be 7 years left if everything was done correctly.
sailaway
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Re: Inherited inherited IRA confusion.

Post by sailaway »

krow36 wrote: Sun Apr 21, 2019 8:44 pm She put the inherited IRA into the trust and neglected to name a beneficiary. :(
Seems like that should have been considered a complete disbursement at that point and is no longer actually an IRA.
bsteiner
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Re: Inherited inherited IRA confusion.

Post by bsteiner »

There have been a few private letter rulings allowing beneficiaries of inherited IRAs to put their inherited IRAs into Medicaid payback trusts for their own benefit where the trusts were grantor trusts for income tax purposes, not completed gifts, and included in the beneficiary's estate.

It would help to pin down the facts in this case.
typical.investor
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Re: Inherited inherited IRA confusion.

Post by typical.investor »

Per Vanguard, for a spouse who inherited after the owner's required beginning date:
If you inherit the IRA, you must begin taking RMDs by December 31 of the year after the year of the IRA owner's death, based on the longer of:

Your life expectancy (recalculated each year), or
The IRA owner's remaining life expectancy.
see https://investor.vanguard.com/inherit/ira-rmd

For an inherited inherited IRA, which since I think we are talking about here as the mom took it that way:
The RMD calculation cannot be reset when a successor beneficiary inherits an inherited IRA.
So assuming the mother had a longer life expectancy that the father, your friend would assume the mother's distribution schedule.

see https://www.irahelp.com/slottreport/inh ... erited-ira
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celia
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Re: Inherited inherited IRA confusion.

Post by celia »

Was Vanguard the custodian when mom owned the Inherited IRA? They, or her custodian, should be consulted on what divisor the mom was subject to and continue with that for an Inherited Inherited IRA.

The part about the trust doesn't make sense to me, though. The trust can't own an IRA (as it has no life expectancy) but can be the beneficiary of one.
inbox788
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Re: Inherited inherited IRA confusion.

Post by inbox788 »

krow36 wrote: Sun Apr 21, 2019 8:19 pmShe did not assume the IRA as her own, but had it titled as an inherited IRA for her benefit. Unfortunately she put the inherited IRA into a trust and did not name a beneficiary to the IRA.
krow36 wrote: Sun Apr 21, 2019 8:44 pm She put the inherited IRA into the trust and neglected to name a beneficiary. :(
Did she inherit the IRA or assume the IRA? https://investor.vanguard.com/inherit/ira

Did she take RMDs for 10 years? Or did the trust? Or something else? And as others have asked, on what schedule? Having actual ages would be helpful.

What was the account type of mothers IRA? Are you sure it was setup as an inherited IRA?

I'm trying to understand how the IRA got in to the trust. If I'm understating it correctly, the father IRA had trust as beneficiary (not that mother listed trust as beneficiary entering trust 10 years later), so the IRA was in the trust while she was trustee. When she died, the 2 kids became co-trustees, correct?

If the mother assumed the IRA, and the beneficiary when she passed was the trust, it seems if setup correctly it my be possible to stretch it. Depending on the complicated situation, it seems possible the RMD could be based on the father's age, mother's age or kids' ages.

https://www.lordabbett.com/en/perspecti ... ciary.html
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cheese_breath
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Re: Inherited inherited IRA confusion.

Post by cheese_breath »

bsteiner wrote: Sun Apr 21, 2019 9:16 pm There have been a few private letter rulings allowing beneficiaries of inherited IRAs to put their inherited IRAs into Medicaid payback trusts for their own benefit where the trusts were grantor trusts for income tax purposes, not completed gifts, and included in the beneficiary's estate....
If that is one of those rare cases, then do we need to know the trustee was? The mother or someone else?
The surest way to know the future is when it becomes the past.
muddlehead
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Re: Inherited inherited IRA confusion.

Post by muddlehead »

IRA RMD's can be complicated for both individuals and their financial/brokerage companies. Duh. Bottom line is IRS wants its tax dollars due them from the distributions. You can cut to the chase by answering these questions. Are you willing to pay tax on the distributions? Or, because it should/could have been in a trust, you are saying no tax should will be owed on the distributions?
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krow36
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Re: Inherited inherited IRA confusion.

Post by krow36 »

I appreciate all the comments and links, which I am studying. I've emailed my friend for more information on his mom's inherited IRA (not assumed) and the trust. My friend believes that his mother was dealing with incompetent, conflicted lawyers, so it's likely that what happened was not what should have happened.
Alan S.
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Re: Inherited inherited IRA confusion.

Post by Alan S. »

krow36 wrote: Sun Apr 21, 2019 8:19 pm My friend inherited an IRA from his mother. She had inherited the IRA from her husband. She did not assume the IRA as her own, but had it titled as an inherited IRA for her benefit. Unfortunately she put the inherited IRA into a trust and did not name a beneficiary to the IRA. She passed 10 years later and my friend and his brother were the beneficiaries of the trust. After considerable difficulty and delay, my friend was able to transfer his half of the inherited IRA to Vanguard.

Vanguard had difficulty determining the 2018 RMD, and different reps came up with 3 different RMDs. His father, the original owner, had started taking RMDs before he died. I don’t know if his mother used his age or her age for her RMDs and it’s possible they were the same age.

Doesn’t the lack of a designated beneficiary require the use of Table 1 and the father’s age in the year of death, reduced by 1 for each subsequent year? If he was 70 when he died 10 years ago in 2007, Table 1 says his Life Expectancy was 17.0 years at that time. Would the Dec 31, 2017 balance divided by 7 (17 - 10) give the 2018 RMD? And the inherited IRA can only last 6 more years?

I don’t understand how Vanguard reps could find 2 very different RMDs in this situation. My friend would like to know which of the Vanguard reps was correct? And if he owes more RMD for 2018??
Although mother did not assume ownership of the inherited IRA, she would still have acquired ownership if she failed to take her full RMD as beneficiary in any year. These are the default rules when the beneficiary is a sole surviving spouse, and ownership is deemed despite the fact that the title of the inherited IRA still shows in beneficiary form. Such an change in ownership would have immediately reduced the RMDs for mother.

Since mother named a trust as beneficiary (assumed since trust ownership is extremely rare and unlikely), if she was the owner AND if the trust is qualified for look through treatment then the oldest beneficiary of the trust determines the RMDs paid to the trust. If mother took all her beneficiary RMDs correctly, then the trust she named would be a successor beneficiary whether qualified or not, and RMDs to the trust would continue to use mother's RMD schedule, but with a 1.0 divisor reduction each year.

The default to ownership has saved the stretch for designated beneficiaries (or qualified trust beneficiaries treated as such) in many cases and is one of the first things to investigate when the second parent passes, because it might save the beneficiary life expectancy stretch.

This whole chain of events unfolds like a decision tree. If just one transaction is missed, the entire RMD situation goes off the rails.
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krow36
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Re: Inherited inherited IRA confusion.

Post by krow36 »

Thanks very much Allan! The decision tree has lots of branches. If mother took all her beneficiary RMDs correctly, and the trustee split the IRA, and Vanguard pulled the 50% of the inherited IRA for my friend: Would my friend’s inherited IRA continue his mother’s RMD schedule with the 1.0 divisor reduction each year? In this case, what would be the correct title of the inherited IRA?
Alan S. wrote: Mon Apr 22, 2019 8:07 pm Although mother did not assume ownership of the inherited IRA, she would still have acquired ownership if she failed to take her full RMD as beneficiary in any year. These are the default rules when the beneficiary is a sole surviving spouse, and ownership is deemed despite the fact that the title of the inherited IRA still shows in beneficiary form. Such an change in ownership would have immediately reduced the RMDs for mother.
If the failure to take her full RMD in any year was discovered and she paid it late and asked for forgiveness, which was given, would she still have acquired ownership?
Alan S.
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Re: Inherited inherited IRA confusion.

Post by Alan S. »

krow36 wrote: Tue Apr 23, 2019 10:42 pm Thanks very much Allan! The decision tree has lots of branches. If mother took all her beneficiary RMDs correctly, and the trustee split the IRA, and Vanguard pulled the 50% of the inherited IRA for my friend: Would my friend’s inherited IRA continue his mother’s RMD schedule with the 1.0 divisor reduction each year? In this case, what would be the correct title of the inherited IRA?

Yes, all beneficiaries of mother would have to continue her RMD schedule, but with a 1.0 reduction in the divisor starting in the year after mother's passing. The new inherited IRAs for the individual trust beneficiaries should be titled ("Megan Smith, as beneficiary of Sandra Jackson" (mother), although each IRA custodian's operating platform is allowed to deviate somewhat. As long as the custodian understands who the most recent beneficiary inherited the plan from, there won't be an issue.
Alan S. wrote: Mon Apr 22, 2019 8:07 pm Although mother did not assume ownership of the inherited IRA, she would still have acquired ownership if she failed to take her full RMD as beneficiary in any year. These are the default rules when the beneficiary is a sole surviving spouse, and ownership is deemed despite the fact that the title of the inherited IRA still shows in beneficiary form. Such an change in ownership would have immediately reduced the RMDs for mother.
If the failure to take her full RMD in any year was discovered and she paid it late and asked for forgiveness, which was given, would she still have acquired ownership?

Good question, whether or not a beneficiary can retain the inherited status of the account after the default rule was activated. Have not seen any consideration of this issue before, probably because the younger spousal beneficiaries who benefit from maintaining inherited status are not required to take any beneficiary RMDs if they are sole beneficiaries until the deceased spouse would have reached 70.5. Since most IRA agreements incorporate this ownership default provision into their agreements, and once ownership has been acquired it is not clear whether a PLR would override the IRA custodian's contract.
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