Disclaiming an IRA Inheritance

I know, I know – who would want to disclaim an inheritance, right?

Well, it happens a lot more often than you think – partly in order to keep from loading one beneficiary’s estate with too many assets, and partly in order to even things out, make it more equal, for all common beneficiaries.  So anyhow, the IRS has rules associated with disclaiming an IRA inheritance, and as usual, there is no sense of humor if you foul it up.

As long as there aren’t a lot of extenuating circumstances, a beneficiary disclaiming an inherited IRA is pretty straightforward – spelled out in §2518, as long as the primary beneficiary(s) executes a written instrument to disclaim all or a portion of the inherited IRA within 9 months of the death of the original account owner, the contingent beneficiary(s) will inherit the remaining account.

One additional little wrinkle – the primary beneficiary(s) can not have received a benefit from the account prior to disclaiming.  Oh yeah, one other thing… according to the rules, if the decedent was already subject to Required Minimum Distributions (RMD), the beneficiary must continue those distributions.

If you’ve been following this, maybe you see the issue: let’s say that the IRA owner dies in November, and has not taken his RMD for the year.  The primary beneficiary has not had an opportunity to consider whether or not it makes sense to disclaim the inheritance or not, and the year-end is closing fast.  So, the RMD is distributed to the primary beneficiary.  According to the rules, this beneficiary has now received a benefit from the account, so she shouldn’t be able to disclaim, right?

Well Revenue Ruling 2005-36 clarified, simplified, and made everything square on this issue.  Within this ruling, the IRS recognizes that sometimes these situations come about, so they’ve allowed for RMD for the year of death to be distributed to the primary beneficary but not counted as a benefit for the purpose of disclaiming rule. So in other words, the RMD doesn’t disqualify the primary beneficiary from having the option of disclaiming.

In addition, RR 2005-36 clarified a couple  of other situations, wherein an primary beneficiary could disclaim a portion of an inherited IRA, allowing that portion to flow to the contingent beneficiary(s).  This can be done as a specific (pecuniary, to use the IRS’ parlance) dollar amount, or a percentage of the account as of the date of death.

That part is important to note, because when a portion of the account is disclaimed, any income attributable to that disclaimed amount has to be disclaimed as well.  So if the account was worth $100,000 on the date of death, and the primary beneficiary disclaimed 25%, then the primary beneficiary would receive $75,000 plus the gains or minus the losses associated with that amount.  The remainder would go to the contingent beneficiary(s).  If an RMD is paid to the primary beneficiary and the primary beneficiary later disclaims a portion of the account, the RMD is counted as part of the primary beneficiary’s non-disclaimed portion.

It’s complicated, so if you have additional questions, just hit me – I’ll do my best to help clarify things.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author