Personal Finance

Money Matters: Disclaiming share of IRA may not be best option for siblings

Q. My dad passed away last month at age 65. He left my sister, brother and myself a rather large roll-over IRA. We are all named as equal beneficiaries and our share of the IRA will be around $150,000 each. Nice of Dad to leave this to us but there is a problem. Dad and Mom divorced a few years ago after over 30 years of marriage. It was the typical marriage where he worked and she stayed home, raised the family and never worked outside the home. When they divorced she got the house with no mortgage and alimony of $30,000/year until her age 67. Mom is now 55 and there is nothing in her divorce decree that addresses the problematic situation of Dad dying before the alimony obligation was satisfied.

In fact it states that alimony will cease upon her remarriage or death of the recipient or payer. Dad rented an apartment, had no life insurance and his main asset was this IRA. He had income from a pension and social security but both stopped upon his death. My sister and I would like to disclaim our share of the IRA and make Mom the beneficiary. Can we do this? If all three of us need to disclaim we think we can convince our brother to join us as long as Mom “repays” him his share over the next fifteen years. Mom will be in financial trouble if we can’t do this so any help you can provide is appreciated.

A. Sorry to hear about your Dad’s death. Your Mom may want to contact her divorce attorney and make sure there isn’t some language (or the absence of language) in the court order that would cause the obligation to continue after your Dad’s death.

The language of the beneficiary form will determine the beneficiaries and also to whom the share will go if a beneficiary disclaims their inheritance. The most common language would have the disclaimed funds of one or more primary beneficiaries going to the remaining primary beneficiaries. If this is the case with your dad’s IRA, if you and your sister disclaim your share, your brother would inherit the entire IRA. In most cases, if all primary beneficiaries disclaim, the contingent beneficiaries will inherit the IRA. If no contingent beneficiaries are named then the funds would go to the default beneficiary which is usually the estate. It is doubtful that any of these scenarios would result in your mom becoming the beneficiary of any portion of your dad’s IRA. When you disclaim, you cannot stipulate the subsequent ownership of your shares.

If you and your sister want to help your mom, the simplest solution would be for each of you to take your share of your Dad’s IRA. Once your beneficiary IRAs are established, each of you could take a distribution and gift money to your mom. Under current tax law, a person can gift up to $14,000 a year to anyone without triggering the need to file a gift tax return. The gift is not deductible to the person giving the money and is not taxable to the person receiving the money. If you are married, you and your spouse could gift a total of $28,000 to your mom. If you chose to do so, you can avoid filing a gift tax return to make what is called a gift-split election by writing separate checks (each $14,000 or less) even if from a joint account. You will of course owe taxes on any distributions from your inherited IRA. Maybe you could convince your brother to reimburse you and your sister for any taxes owed on the amounts distributed from the IRAs and subsequently gifted to your mom.

Whatever you decide, remember that a required minimum distribution (RMD) must be taken from an inherited IRA each year following the year in which the original IRA owner died. If the RMD is not taken a 50 percent penalty may be accessed in addition to the income tax owed.

The specific rules regarding the RMD are beyond the scope of this column.