Why would anyone ever refuse an inheritance? When couples set up their estate plans they don’t always know in advance whether there will be sufficient assets available at the first death for the surviving spouse to live on, and they want to ensure that their availability. The surviving spouse, or individual beneficiary, may know that they have sufficient assets in other accounts and knowing they will not need the funds from the IRA wish for another to benefit from the inheritance. The beneficiary may have promised the decedent to disclaim the account so that the funds go to the decedent’s blood children rather than eventually passed on to the surviving spouse’s children, born from a prior marriage. Or, the beneficiary may want to keep their estate value minimized to avoid estate taxes at his/her death (subject to the current individual estate exemption). Here is what you need to know: the beneficiary does not control/choose who gets the asset if they disclaim it. The IRA will pass directly, with no blockage from the Probate Court, to the contingent beneficiary named on the decedent/owner’s IRA account. If there is no contingent beneficiary listed then the IRA custodian will pay out to the estate – which then the Probate court gets involved and considers direct heirs or next of kin. This may, or may not produce the desired result.
Now, when IRA account holders pass away without having taken their RMD for the current year, it still has to come out and it goes to the listed beneficiary. The IRS actually permits a beneficiary to disclaim an IRA account even after receiving the final RMD from the account owner. The deadlines for both the IRA distribution rules and the IRS disclaimer rules have to be met. Which comes first, the RMD or the disclaimer? This can be tricky depending on how quickly the probate process is moving and whether it is a complex or simple estate. The IRS requires the beneficiary to take the year-of-death RMD by December 31st year-of-death. (This requires the beneficiary to open an IRA account in his/her name and process the RMD, which means that the Executor of the estate has already received the Letter of Testamentary by the Probate Court.) If the RMD is not taken by the deadline, it is subject to a 50% tax penalty. The IRS disclaimer rules are a bit different. A beneficiary has until nine months after the date-of-death to disclaim, or refuse, the IRA……but, here is the clincher….the beneficiary is not supposed to receive any benefit from the IRA before she disclaims the asset. Hmmm. So how can this work? In the Revenue Ruling 2005-36 released by the IRS, the beneficiary made it permissible to take the year-of-death RMD before the December 31st deadline AND still be able to disclaim the balance of the IRA account.
