What you need to know about death and RMDs

Q. What happens if, in the year a retiree passes, he has not yet taken his Required Minimum Distribution (RMD) from his traditional IRA? Where does this leave the beneficiary with respect to the deceased’s final tax return and the beneficiary’s income tax return? For example, an 85-year-old retiree passes on June 1 and has not taken his RMD. What happens?
— Managing an estate

A. Death won’t stop an RMD requirement.

If you’re managing this estate, or if you will, you need to contact the broker of record for the account to arrange for the RMD if it wasn’t taken by the person who died in the year of his death.

This final distribution should be based upon the decedent’s life expectancy based on age, prior to death, as set forth in designated IRS tables, said Catherine Romania, an estate planning attorney with Whitman Stadtmauer in Florham Park.

But the distribution should be made payable to the beneficiary of the account, Romania said.

“The beneficiary includes this income on his/her income tax return,” she said. “The distribution must be made prior to Dec. 31 of the year of death, otherwise an excise tax equal to 50 percent of the Required Minimum Distribution not taken can be imposed.”

If there is more than one account in the decedent’s name, the amount required to be withdrawn is a percentage of the cumulative value of all of the decedent’s individual retirement accounts (IRAs), Romania said. The Required Minimum Distribution can be taken from one account or pro-rata from all the accounts.

“If there are different beneficiaries for each of the different accounts, unless the beneficiaries agree otherwise, not taking the distribution pro-rata could give rise to controversy,” she said.

In some cases a beneficiary may want to disclaim the inherited IRA, Romania said. For example, decedent may have named his/her adult child as the designated beneficiary and an adult grandchild as the successor beneficiary. In such a case, the child may want to disclaim the inherited IRA in order that his/her child may benefit instead.

“In order to successfully disclaim an asset, a beneficiary cannot first exercise control over the asset or `taint’ the asset,” Romania said. “Taking the Required Minimum Distribution as described does not taint the account for disclaimer purposes.”

Romania said it’s important to obtain a copy of the current beneficiary designation form before deciding to disclaim in order to ascertain who is named as the successor beneficiary.

“A younger designated beneficiary allows the payments to be stretched over a longer time, as the Required Minimum Distributions are based on the beneficiary’s life expectancy calculated using the age of the beneficiary in the year after the decedent’s year of death,” she said.

Also remember that individual retirement accounts are included in a decedent’s taxable estate, and if such estate is greater than the federal exemption amount ($5.43 million 2015; $5.45 million in 2016) and not passing to a spouse, the estate may be subject to federal estate tax.

“The beneficiary receiving the distribution may also incur a federal income tax; however, if a federal estate tax was incurred, the beneficiary can receive a deduction for income tax based on the estate tax attributable to the IRA pursuant to IRC §691(c),” Romania said