What You Should Do When an IRA Beneficiary Rejects the Inherited Assets
By Jodie Norquist, CIP, CHSP
While most of your IRA beneficiaries will appreciate that they have inherited an IRA from a friend or loved one, others may be less than thrilled at the news. Perhaps the beneficiary wishes that someone else would have inherited the assets, or maybe there are familial relationship considerations that run beyond the scope of your duties as an IRA administrator.
The bottom line is, everyone has the right to refuse an inheritance, including an IRA.
Beneficiaries who do not want to receive inherited IRA assets may disclaim their interest in the IRA, but they only have a certain amount of time to do so. A beneficiary cannot simply delay or do nothing with the IRA in hopes that it will all go away. That’s a surefire way of inheriting assets that are unwanted.
What is a Beneficiary Disclaimer?
A beneficiary may disclaim a whole or partial interest in an IRA, according to Internal Revenue Code Section (IRC Sec.) 2518. As a result, the beneficiary is treated as though he had never been named a beneficiary in the first place or as though he predeceased the original IRA owner. He is relieved of the financial benefits and tax consequences of receiving the IRA assets.
A disclaimer is a permanent decision and cannot be revoked. If a beneficiary disclaims IRA assets, she must provide a written disclaimer to the financial organization within nine months after the IRA owner’s death or, if later, within nine months of the date on which the beneficiary attains age 21.
In other words, if a beneficiary doesn’t want the IRA assets, she should be informed that—unless she is under age 21—she has only nine months after the IRA owner’s death to disclaim the assets. Otherwise, the IRA is hers.
What are the Requirements of a Beneficiary Disclaimer?
To make a qualified disclaimer, the beneficiary must meet the requirements of IRC Sec. 2518(b)
The disclaimer must be in writing.
The written disclaimer must be received by the financial organization within nine months after the IRA owner’s death or within nine months of the date on which the beneficiary turns 21.
The beneficiary may not accept any of the disclaimed assets or any of the benefits attributable to the disclaimed assets.
The beneficiary isn’t allowed to direct how or to whom ownership of the assets is transferred.
What To Do When a Beneficiary Disclaims the IRA Assets
If a beneficiary presents you with a written disclaimer, you should use a process similar to when a beneficiary predeceases the IRA owner. For example, if a sole primary beneficiary disclaims his interest, then the assets would be distributed to any contingent beneficiaries. If there are two primary beneficiaries and one of the beneficiaries disclaims her interest, then all IRA assets would be distributed to the other primary beneficiary. If there are no other beneficiaries listed, refer to the default provisions in the IRA plan agreement. Typically, the late IRA owner’s estate becomes the beneficiary if a beneficiary is not named.
When an IRA owner dies, he may not have satisfied his required minimum distribution (RMD) in the year of death. In these situations, the beneficiaries would need to satisfy the RMD by Dec. 31 or face a 50 percent excess accumulation penalty tax that would apply to the unsatisfied RMD. But if certain conditions are met, a beneficiary may receive the year-of-death RMD and can, in turn, submit a qualified disclaimer for all or a portion of the remaining IRA assets, according to IRS Rev. Rul. 2005-36.
When in Doubt, Consult Your Legal Counsel
As previously mentioned, a disclaimer cannot be revoked. Beneficiaries who are thinking about disclaiming their inherited IRA assets should see a competent tax or legal advisor before doing so. If you have concerns about whether a beneficiary has provided you with a qualified written disclaimer, consult with legal counsel at your financial organization.
