What Happens When the Beneficiary of an Inherited IRA Dies?

[Deleted]

We've been having a lively debate over on YM about the proposed limits on IRA balances. One question I can't seem to find the answer to is what happens when the Beneficiary of an Inherited IRA dies? Does the IRA live on but with a new bene and a new casting of RMDs? Or does the inherited IRA just become part of the estate and subject to whatever estate tax limits are in place?

I hadn't really thought about it but we are planning to clean up MIL's estate documents next month. We should also review her beneficary stuff too. DH is the beneficiary of her IRA and I know you can list a secondary bene and the first bene can decline the inheritance (great for passing along an IRA to a child or grandchild). But in our case, DH is an only child and we have no children.

Thanks!

[mwcpa]

The answer depends on when the first beneficiary passes.

[Deleted]

Assume MIL passes 5 years from now (2018). She will be 83. And DH passes in 10 years. He will be 64 (I hate even THINKING about this!).  We're in a community property state (CA) with all of our estate planning having our assets currently going into our living trust. After we pass, the bulk of our estate will go to a couple of charities. I know the tax laws may change over the next 10 years but how would the transfer of MIL's IRA to me work tax-wise? And when DH inherits the IRA, I think titling changes to "MIL IRA fbo DH" At that point would a new beneficiary designated?

I know IRAs are only about 30 years old but there's got have been a few meaningful ones that have transferred by now. Value of IRA is about $330k and she's only taking RMDs. Given her fabulous federal pension and long term care insurance, she's likely to only keep taking RMDs for the foreseeable future and I doubt we would take more than RMDs over the first few years once DH inherits.

Thanks!

[mwcpa]

In the situation you note your dh would have already liquidated the mil IRA by the time he met his untimely demise at such a young age.

[Deleted]

He would have to liqudate a $330k IRA in 5 years?

I thought he would be taking RMDs over his lifetime? Wouldn't that be about 20 years? ETA: I just looked it up 21.8 years for a 64 year old.

If he only takes RMDs for 5 years I think there's still going to be a decent balance, perhaps close to the $330k original balance depending on how the investments do. What happens to the IRA when he dies? Does it stay an IRA or is it immediately liquidated as part of his estate?

It occurs to me that as part of helping MIL's estate planning that it might make sense to have MIL add me as a second beneficiary to stretch out the RMD payout a little longer. That way if we don't really need the money DH can decline the inheritance and the RMD's will be calculated using my age (3 years younger). I know it's not much but every little bit helps!

Thanks for your thoughts and suggestions.

[mwcpa]

Planning for what is best here requires significant thought and knowledge of the financial situation of the beneficiaries.