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RMD Not Taken


TaxmannEA

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An 80 year old man died last year and the family has been going over his papers and settling his estate. It seems that he had an IRA that he had never taken any distributions from. He really didn't have a filing requirement as his income didn't exceed the minimum, even if he had taken the RMD. The balance in the account went to his sister's estate as she passed shortly after he did. The funds were passed to her heirs through her estate. 

My problem is this. Should the original TP be subject to penalty for not taking the RMDs for all those years? Does the estate have any responsibility for this? The executor is having kittens over this. There is no tax avoidance involved as inclusion of the funds would not have resulted in federal or state tax liability.  The decedent was probably not of sound mind as he was a hoarder and the house was full of every scrap of paper that he ever had. (Except for the financial records that we need.)  Is there any penalty abatement that might help in this situation?

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I have had this happen on more than one client.  If they take it out when they discover the error and ask for abate of penalty I have never had any refused the abatement of penalty.  So if he would not have owed tax on the amount or interest then I would just move on and have the estate distribute the IRA and let the beneficiary pay the tax.

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16 hours ago, grandmabee said:

I have had this happen on more than one client.  If they take it out when they discover the error and ask for abate of penalty I have never had any refused the abatement of penalty.  So if he would not have owed tax on the amount or interest then I would just move on and have the estate distribute the IRA and let the beneficiary pay the tax.

I'm confused, you'd have the sister's heirs take the distribution now instead of spreading it over several years?

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Upon the death of the original owner, the designated beneficiary(ies) becomes the owner of the IRA and has the responsibility to take the RMD in the year of death if the deceased didn't do so, and the beneficiary would also have the responsibility to rectify any shortfall because of missed RMDs. Each beneficiary should take his or her share of the distributions for the shortfall as soon as possible after the shortfall becomes known, and it can be taken all as one lump sum.

Prepare a schedule showing each year's RMD that the deceased should have taken and, if more than one beneficiary, show how each of the year's RMDs are split up among them. Using the appropriate year's forms, each beneficiary completes separate 5329s for each year that a shortfall occurred, and requests penalty abatement on each of those forms. Because these are for prior years, the 5329s must be filed separate from the 2019 return and must be paper-filed, e-filing not allowed.  I'd file them all together with an explanation that includes the request for abatement and the schedule showing the shortfall and its allocation to each of the heirs.

Going forward, each beneficiary will also follow the distribution rules for inherited IRAs by nonspouse beneficiaries of decedent that was over 70.5 years of age and dying in 2019 or earlier. 

Edited by jklcpa
added last statement.
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23 minutes ago, jklcpa said:

Upon the death of the original owner, the designated beneficiary(ies) becomes the owner of the IRA and has the responsibility to take the RMD in the year of death if the deceased didn't do so, and the beneficiary would also have the responsibility to rectify any shortfall because of missed RMDs. Each beneficiary should take his or her share of the distributions for the shortfall as soon as possible after the shortfall becomes known, and it can be taken all as one lump sum.

Prepare a schedule showing each year's RMD that the deceased should have taken and, if more than one beneficiary, show how each of the year's RMDs are split up among them. Using the appropriate year's forms, each beneficiary completes separate 5329s for each year that a shortfall occurred, and requests penalty abatement on each of those forms. Because these are for prior years, the 5329s must be filed separate from the 2019 return and must be paper-filed, e-filing not allowed.  I'd file them all together with an explanation that includes the request for abatement and the schedule showing the shortfall and its allocation to each of the heirs.

Going forward, each beneficiary will also follow the distribution rules for inherited IRAs by nonspouse beneficiaries of decedent that was over 70.5 years of age and dying in 2019 or earlier. 

You always go into great detail and explain everything,  I seem to make my answers too short and to the point without the details.

You are an asset to this group.

 

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7 minutes ago, Terry D said:

I have nothing to add here as Judy hit it spot on. But... can the benes request tax to be withheld from the rmd's that make up the short fall to reduce or eliminate a huge tax burden at the end of the year??

Yes, if properly set up, the accounts will be inherited IRAs in their own names and the disbursement request forms will include the standard language to request or decline federal and state withholdings from the distribution.

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