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I know, I know – who would want to disclaim an inherited IRA, right?
Well, it happens a lot more often than you think – for many reasons. An individual may disclaim an inherited IRA to keep from loading one beneficiary’s estate with too many assets. Or maybe to even things out, make it more equal, for all common beneficiaries. Whatever the reason, the IRS has rules associated with disclaiming an inherited IRA, and as usual, there is no sense of humor if you foul it up.
Generally, a beneficiary disclaiming an inherited IRA is pretty straightforward – spelled out in Internal Revenue Code §2518, as long as the primary beneficiary 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 cannot have received a benefit from the account prior to disclaiming. And one other thing that complicates matters… according to the rules, if the decedent was already subject to Required Minimum Distributions (RMD), the beneficiary must continue those distributions in a timely manner.
So 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 inherited IRA 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?
The good news is that 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 a 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 up in the comments – I’ll do my best to help clarify things.
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Dad passed away in March (Florida resident) – 4 months ago, he had no assets that had to go through probate. IRA Annuity beneficiary is Christy (1 of his 4 adult children), the contingent is Robby (another of his adult children) – the 2 other adult children aren’t named as IRA beneficiaries. For ease of question, IRA is $100,000 and everyone agrees to split evenly. If beneficiary Christy claims $25,000 and disclaims $75,000, then contingent Robby claims $25,000 and disclaims the remaining $50,000 …
Can the $50,000 be assigned to other two adult children or would it go to Dad’s estate? If Dad’s estate, we would need to file probate, incur Attorney fees, open $50,000 to any of Dad’s bills due, go through probate process, etc? Thanks!
My understanding is that the remaining $50k in your scenario would go to the estate. You will want to confirm this with an estate attorney for your state, of course.
One way to accomplish the split that you’re hoping for would be for the original beneficiary to take the full withdrawal and split up the withdrawal among the four. Of course, that original beneficiary would be responsible for the taxes, which could be withheld from each portion paid out to the others, but the tax hit of $100k could cause other issues (IRMAA penalty, for example) so this might not be a preferred option.
My mom was widowed. I am 100% beneficiary on an IRA and have one biological sibling. If there are no contingent beneficiaries listed would my biological sister get the disclaimed portion of the IRA being that she is the only other remaining biological child? What about step-children?
This will be dependent on your state’s estate law. If the IRA beneficiary designation is disclaimed (even a portion of it), then the state law takes over. If there is a will indicating what is to happen with the remainder of the estate this can help. Check with a local estate attorney on how this would play out for you.
My mother passed away on May 3, 2021. She named 4 beneficiaries on her Roth IRA account, which were her 3 grandchildren and a Niece. The Niece was added as a beneficiary in 2017. My Mother had long term Dementia and other mental health issues. In 2017 – 2018, she started making very unusual and very frequent changes to her beneficiaries. The Niece wants to Disclaim herself as a beneficiary to the ROTH IRA. The Estate has been tied up in the Probate process. We are now 9 months and 11 days since my Mother assed away. Can the Niece still Disclaim herself as a beneficiary since it is past the 9 months? If not, could we do a Petition for Declaratory Judgement with the Probate court to ask the court to invalidate the beneficiary changes made in 2017 to add the Niece?
My understanding is that the §2518 9 month limitation is strict. I suggest that you discuss the other suggestion with an attorney to get a clear view of whether or not this can be done.
If nothing can be changed, and since it’s a Roth IRA, the Niece could take the distribution and parcel it out to the remaining beneficiaries with no tax consequences. The downside is that this money would not enjoy future tax-deferral within the Roth account, but that may not be an issue.
Oregon has a $!M estate tax exemption, estate tax is substantial. Spouse is the primary beneficiary of each IRA. As beneficiary designations exist at the moment any of that asset disclaimed would pass to the contingent beneficiaries. Can the contingent beneficiary be changed to a disclaimer trust for the benefit of the spouse thus excluding the asset from the estate of the survivor? What SSN would be attached because one of the IRAs is subject to minimum required distributions.
I think you should consult an estate attorney in Oregon about this, I don’t have any experience with a situation like that.
My mother passed away in October. There are three of us sibblings to equally share her assets. Me and my sister wish to disclaim our part of the IRA and have it distributed to our other sister. This is for tax purposes and also it will be used to pay for funeral and other expensed she had. Is there any problem for us to wtite a disclaimer for the IRA? We want the 1099R to be issued in our sisters name.
This should be a straightforward disclaimer for you and your sister, leaving everything remaining to your other sister. Talk to the custodian of the IRA to make sure they understand what you’re doing, and act quickly, don’t save this for the end of the year.
My father died and designated his IRA beneficiaries to me and my brother per stripes. I have a half brother and sister as well (there are 4 of us in total). All 4 of us are heirs to the estate, but the IRA beneficiaries trump the will so my brother and I are the only 2 that benefit from the IRA.
We would like to share the IRA the same way the estate is divided. To disclaim my other 2 siblings portions of the IRA so that they get their share, I would have to disclaim it per stripes (my kids are minors). We only want to disclaim the part that goes to my 2 siblings that were excluded as beneficiaries of the IRA.
My questions:
1. Can I avoid it going to my kids so that my other 2 siblings can get part of the IRA? How do I disclaim per stripes?
2. Assuming it can go into the estate after disclaiming it for myself and my kids, will it follow the estate’s distributions and be divided by 4 when it comes back into the estate– meaning a portion would come back to me instead of directly to my other siblings? I only want to disclaim the part that goes to my other 2 siblings.
Apologies for the delayed response, for some reason this comment was misdirected and I just now discovered it.
You will want to talk this situation over with an estate attorney for the state that your father was living in when he passed away. The rules can be different for how the estate is handled, depending on what state this takes place in.
Sorry I can’t be more help to you – best wishes.
Thanks for the response. Unfortunately, we’re speaking (interviewing) with a number of attorneys in North Carolina where my father passed away and they all say different things. The answer seems complicated so that is why I posted the question to see if you had any advice. Disclaiming is a bit scary because we lose control over what happens once it is done, but I guess we’ll see what happens.
Thanks again.
I am the sole beneficiary of my brothers 401k. He died 4/2018. In 10/2019, his adult kids talked me into signing a statement that they would receive the funds, not me. None if them are contingent beneficiaries. The plan administrator will not accept the disclaimer, as it was over 9 months since date of death, and cannot be directed to specific people. Is this a valid disclaimer?
No – as the plan administrator has noted, the disclaimer attempt was more than 9 months after the date of death. It would have been, had it been timely. But the outcome would have depended on exactly how the home state determines estate distribution without other direction, unless there was a will directing “all other assets” to specific individuals/entities.
At this stage, your only option is to take distribution of the 401(k) as the sole beneficiary. If you choose to give that money to the adult kids of your brother, that’s your call. Just understand that you are paying income tax on the distribution, as well as taking responsibility for the income on your tax return, which could affect other matters, such as your Medicare premiums, etc..
Hi Jim,
If an IRA has only one primary beneficiary but no secondary, can the primary disclaim to someone, or is a secondary required? If no secondary, can the individual who receives the disclaimed IRA still keep it as an inherited IRA?
In that situation if the primary disclaims, the only remainder is the estate of the original owner. In other words, with no other beneficiary named prior to the death of the original owner, no one else can name a secondary (or any) beneficiary.
What if there isn’t a contingent beneficiary listed (trust is it’s beneficiary). Does it go to the surviving spouse then? Notably, There are no disclaimer provisions in the trust. If so, can it rollover without any tax consequences to that surviving spouse?
If the surviving spouse is the sole beneficiary of the trust, then the IRA should be available to be rolled over – at least that’s my understanding. Otherwise, however the trust is designated for distribution will rule. I assume in this response that the trust is a see-through trust, which allows for the beneficiaries to set up separate inherited IRAs for themselves.
Every situation seems to be unique ours is no different. There are several beneficiaries. Can the younger beneficiaries each disclaim a portion of the IRA leaving the funds to the oldest who will not disclaim or does the disclaimed money go back to the estate.
That strategy should work the way you suppose – but I suggest that you talk to an estate attorney to ensure that this is the way it will work in your particular state.
My dad died in 2000, and my stepmom was the primary beneficiary of the inherited IRA. My 2 siblings and I are the contingent beneficiaries. The problem is that our stepmom has millions of her own, where my dad’s IRA probably wasn’t worth more than a million to begin with. She’s been taking the RMDs every year even though she doesn’t need that money herself, and we’re worried about the money being gone in the next few years. Is it way too late if she were to agree to disclaim the IRA and pass what’s remaining to us? If so, are there any other options?
Unfortunately the disclaimer must be done within 9 months of the death of the original owner. And your stepmom is required to take the distributions, there’s no way around that either.
But there’s nothing to keep her from giving the money from the distributions to you and your siblings, if she chooses to do so. That’s entirely up to her.
Beyond that, I don’t know of anything you can do to change how things are currently set up.
Can the estate of a deceased person make a qualified disclaimer of an inherited IRA? For example, two married individuals die within a month of each other. They had each been each other’s primary beneficiaries. Suppose it was advantageous for the second spouse to disclaim (so as to receive preferential tax treatment); can the administrator of the second spouse’s estate disclaim this inheritance?
That’s a good question for an estate attorney. My gut feeling is that it’s not allowed, but I’m not an attorney. It could be different depending on the state testate laws where this is occurring, as well.
We have an IRA where one of the beneficiaries is not being responsive as he is unhappy with his %. He refuses to disclaim, but won’t set up a beneficiary account. Brokerage says his share will remain in the original IRA and RMDs will have to be made. Who are they made to, and who can make them? If not made, the estate will take a big tax hit. Any suggestions here?
If the beneficiary does not disclaim, I believe his share of RMD will be distributed to him from the original account (or what’s left of it if the other beneficiaries have rolled over their portions to inherited accounts). The effect is the same, just more complicated.
Regarding suggestions, not much can be done if the beneficiary is unhappy with his share. It’s a matter of negotiation among all of the heirs, I assume.
Hi Jim,
The blog is great! I have a question about an inherited IRA. My father had an IRA and died in December 2019 at age 84. My mother was the primary beneficiary on the account, but died in April 2020 at age 75 before transferring the account into her name. I am 40 years old and was listed as the contingent beneficiary. The account transferred from my father directly to me. Can I apply the stretch provision to the IRA? Alternatively, could I act on behalf of my mother’s estate to disclaim ownership of the IRA and transfer it directly to me?
I believe you can, assuming you’re the only heir (?), request that your mother’s estate disclaim the inherited IRA and then you’d be considered the designated beneficiary. This would put you in the position of being under the pre-SECURE Act rules, allowing for a lifetime RMD calculation, as opposed to the maximum 10-year payout under SECURE. Any other scenario puts your inheritance under the SECURE Act rules – to the best of my understanding.
You absolutely will want to vet this with a competent estate/tax attorney to make sure it’s the appropriate action with the expected outcome. I am not an attorney so my opinion is only my opinion, it carries no weight or authority.
Understood! I have a sibling who is an equal co-beneficiary of the estate and contingent beneficiary on the account. The assets were split equally and transferred directly to inherited IRA accounts in our names.
My son-in-law named his beneficiaries to his ROTH IRA prior to marrying my daughter. He recently passed after marriage to my daughter, but before updating his beneficiaries. All previously identified beneficiaries have disclaimed all interest in the ROTH IRA. I would think his wife would then receive a spousal inheritance of the ROTH IRA and would be allowed to assume the ROTH as her own. There is an open question with the IRA’s custodian whether they can execute the transfer as a Spousal Inheritance allowing her to assume it, or as a non-spousal inheritance requiring RMDs over 10 years. Your thoughts would be appreciated.
If your daughter was never named as a beneficiary of the account, she will not (likely) be allowed to take this on as a spousal beneficiary. Most likely, if all named beneficiaries have disclaimed, the estate will be the beneficiary, which will result in a 5-year payout period to the estate’s beneficiaries. Estate law in your son-in-law’s state of domicile will determine how it will ultimately play out.
I am the sole contingent beneficiary of my Mother’s IRA. The primary beneficiary was my father who is also deceased. In addition, I have 3 sisters. Is it possible for me to disclaim 75% of the IRA so that all of us siblings can each receive a quarter of the account? If the answer is yes, would the remaining 75% have to be paid to the estate or could my sisters each be named?
Yes, you can disclaim 75%, but then the disclaimed portion goes to the estate. After the death of the owner of the account no new beneficiaries can be named. You’ll want to work with an estate attorney to clear up the remainder properly, it’s going to be complicated.
Hi our situation is a little complicated. My step father passed away and my mother is his beneficiary and I am the contingent, but she passed 3 months later. The IRA company is saying that the IRA has to go into my mother’s trust, which includes my sister and daughter. Is this the way it works? I’m a little overwhelmed and confused by this. Thanks for any information you can give me
This sounds like it’s being handled properly – the contingent beneficiary only applies if the primary beneficiary is not alive upon the death of the original owner. So if your mother had not named beneficiaries for the account, then her estate is the beneficiary after her death.
Hi, my brother passed away, never married, had IRA accts of which I am sole beneficiary. He was 51, I’m 48. I am also successor trustee and sole beneficiary on trust too. I am trying to find greatest tax advantage here. If I disclaim, according to my understanding, it falls to estate, which is me also, so is there no way to pass this down to my children besides taking the RMD and then gifting it to them post taxed?
Unfortunately, none that I know of. You might check with an estate attorney to see if there’s any other avenue beyond the IRA account(s) to transfer ownership (and taxation) to other heirs.
Can I name my AB living trust as primary beneficiary of my IRA and my wife secondary beneficiary? Then at the time of my death can the Trust disclaim the IRA and have it go to my wife if at the time the funds wouldn’t be needed for the bypass portion of the trust to avoid state estate tax? Thank
It seems plausible to me, but I am not an attorney. You really should get an estate attorney’s opinion on this.
Assuming that the IRA is held at a financial institution/brokerage house, specifically what does the disclaiming beneficiary need to do? Will the institution have a form letter that they require? And, what does the contingent beneficiary need to do so that they can roll the IRA to a beneficiary IRA?
Some custodians will have a form letter for disclaiming, but if yours does not, you may want to have an attorney draft a letter for you so that you cover the bases properly.
As far as what the contingent beneficiary must do, once the custodian has accepted the disclaimer, he or she would just set up an inherited IRA at the custodian of choice and submit the paperwork to rollover the funds to the new account. The new account can be at the same custodian, it doesn’t have to change.
If the estate is the beneficiary, and the will says to “divide among 5 people, and if any of the 5 have pre-deceased the owner of original account, then give that portion to that person’s children” , THEN if one of the original 5 disclaim all or a portion of the inheritance, then will that person’s children in fact receive the portion that was disclaimed ? And not go back to the original remaining 4 beneficiaries?
Most likely in a case like this, the disclaimer redirects the account to the four remaining beneficiaries. The contingent beneficiaries (or per stirpes as is the case here) only apply if that particular beneficiary has pre-deceased the original owner.
If a primary beneficiary disclaims only a portion of the inherited IRA, can he/she dictate how the disclaimed portion is distributed to the contingent beneficiaries.
For example, surviving spouse is primary beneficiary. Four children are contingent beneficiaries. Disclaiming 25% for one of the children would be beneficial for some reason (tax planning, personal reason, etc). Can she disclaim 25% and have it go to that one child or does that 25% have to be distributed equally between the four contingent beneficiaries. I suspect it will have to distribute it evenly.
thanks!
No, the account documents (or ultimately the estate statutes) determine where the disclaimed portion goes.
In your example, disclaiming by one of four equal beneficiaries will result in the other three getting 33.33% (one-third) each.
I have a similar question to a previous post. Disclaiming an IRA to children/grandchildren not named but per stirpes.
Main question- If I am the primary beneficiary with per stirpes, can I disclaim and have the inherited IRA go to my children.
In a more complicated scenario, surviving parent is primary beneficiary. Four children are contingent beneficiary per stripes. surviving parent disclaim to contingent beneficiary. Can each sibling either keep IRA or disclaim his/her portion to his/her children?
If you are not able to disclaim to “per stirpes”, are you able to assign a lower level/next level beneficiary below a contingent beneficiary that a contingent beneficiary can then disclaim to.
thanks!
No, the per stirpes clause allows transfer of the account/inheritance to your heirs if you are deceased, but if you disclaim then the remaining named beneficiaries will receive the inheritance. If there is no other heir and you are then the sole beneficiary of the estate, disclaiming could pass along the ownership of the inherited IRA to your heirs, depending on state statutes.
In your second scenario, since the children are named as successors they would take over the inherited IRA if the primary beneficiary disclaims. But if one of the children disclaims, the other contingent beneficiaries would take over that share. If all disclaim, then the estate would inherit the IRA, and state statute would determine the final distribution (as above).
Can the contingent beneficiary be a charity and will the estate get the deduction on the death tax return?
If the charitable contingent beneficiary comes into play, meaning that the primary beneficiary has pre-deceased or has disclaimed the IRA, then yes, the estate would deduct the amount of the IRA from the total taxable estate.
My two siblings and I are the beneficiaries of my Mom’s IRA. I would like to pass the IRA to my (minor) children. If I disclaim the IRA, will it go to my children? My Mom’s will (and other documents) say that if I (or one of my siblings) predecease my Mom, then my children split my share. So I am sure that this would be my parents intent.
Disclaiming the IRA will just remove you from the situation, and leave your two siblings to split the remainder. This is because they are named beneficiaries as well. If you were the sole beneficiary, disclaiming would direct the IRA to your Mom’s estate, to be distributed per will (if there is one) or per state statutes in the absence of a will.
To direct your portion of the IRA to your children, you’ll need to accept (not disclaim) the inheritance and then either distribute the funds from the account (paying tax) and give to your children. Otherwise, you could hold onto the portion of the IRA in your name as an inherited IRA, taking annual RMDs from it, and naming your children as the beneficiaries of the inherited IRA portion.
i am a beneficiary of an ira. i am on disability and cannot afford to lose my health benefits. i want to disclaim the ira and give it to one daughter, i have three. can i do this?
If you have not accepted the inherited IRA (that is, if you have not taken any distributions or moved the account to an inherited IRA), then you should be able to disclaim. Depending upon how the IRA beneficiary documents were set up, if there was a contingent beneficiary designated, then that person would receive the IRA. If no contingent beneficiary was designated, then the estate would become the beneficiary and it would need to be directed according to the estate’s wishes, which may or may not accomplish what you were hoping to.
Hope this helps –
jb
I have a similar situation, however I want the money to revert back to the estate so it can be split between my siblings. (the account was my mother’s, she inherited from my father six months ago when he died). The money has been moved out of her inherited account and into an account in my name. The management company has notified me that I have 60 days to either cash out or move into another tax exempt fund. Does this constitute receiving a benefit? (I have not touched the money, and I didn’t move it the management company did).
I believe that since the money has been withdrawn into your account, this constitutes beneficial receipt of the money. IF this can be unwound to allow for the reversion to the estate, I think you’d need to put the money back into the original account (your mother’s inherited account?) or another non-IRA account owned by the estate, and let the estate take over as beneficiary of the IRA funds. Please consult an estate attorney to confirm this – I am not an attorney and my opinion is only that, an opinion.
Please clarify whether RMD’s that were already being paid to the decedent would prevent a disclaimer by the primary beneficiary within the 9 months following original account holders date of death. Are there any implications of the 2019 Secure Act on this subject of disclaiming?
I don’t think the SECURE Act changed anything about the disclaiming rules.