Basis in Inherited IRA?

[Frustrated-in-IL]

Taxpayer died in July with a Traditional IRA with basis.  However, the IRA was at three institutions.  At two of them, the beneficiaries were her children.  At the third, she did not name a beneficiary and it will end up in her estate.

I have spent a few hours researching this and I cannot find the answer.  I know the basis follows the IRA.  And if it was just split between three kids, I would allocate a third to each.    But that is not the case here.  When the beneficiaries are different at the various institutions holding the collective Traditional IRA, how do you allocate the basis? 

I was thinking of trying to somehow determine the value held by each institution at the date of death, and then allocating the basis by the percentage each institution held to the overall value at date of death.  Once I have that, I can then determine how much goes to each beneficiary, including the estate.

Does that seem reasonable?  Or is there some rule covering this that I am oblivious to?

[IRonMaN]

I have never run into your problem, and you have a few hours of research invested into the issue, but as I was reading my pea brain was thinking I would go the percentage route that you were thinking.

[rbynaker]

I've also wondered about the answer to this question (and like IRMN, it's never come up in practice, only in theory).  Absent any useful guidance to the contrary, I'd go with your pro-rata by FMV method.

My follow-up question though, how do the heirs prove basis in an audit?

[Frustrated-in-IL]

I suppose a copy of my allocation worksheet, the last 8606 of the deceased, and something showing FMV on date of death.

[rbynaker]

---

@Frustrated-in-IL wrote:

I suppose a copy of my allocation worksheet, the last 8606 of the deceased, and something showing FMV on date of death.

---

I think that's probably as good as it's going to get.  But I'm not sure the 8606 "proves" anything, maybe consistency (so about as much as a medical record "proves" that your dependent lived with you--oh look, they told the doctor's office the same thing they told the IRS).

Out in the real world though, how many IRA beneficiaries are going to get that much information?  I think that's going to be a giant sinkhole where a majority of IRA basis will get lost in the future.  I would provide the info to heirs if I were involved in the process (and kudos to you for doing it!)  But I'd guess we're in the minority.  I'm sure once this becomes a widespread problem, Congress will release a patch in SECURE 9.0 when passed in 2047.

[BobKamman]

This is why I tell my clients past age 70 to consolidate their IRA's into one account.  How did they end up with three, and was it all in one place at one time?  What do you do if the account holder is still alive, and decides to take the entire distribution from the account that never had any basis?  Do you still file the 8606 and allocate some of the basis to it?  

Who is your client?  It doesn't really matter for the decedent's return, right?  So you're doing one/two/three of the kids' returns?  How are you allocating your fees among them?  

[sjrcpa]

"What do you do if the account holder is still alive, and decides to take the entire distribution from the account that never had any basis?  Do you still file the 8606 and allocate some of the basis to it?  "

Yes. 

[qbteachmt]

I don't know if any of this is helpful...

"But I'm not sure the 8606 "proves" anything"

Line 2 has basis as dollars. If the taxpayer was taken RMD, then every year has the updated amount.

"and then allocating the basis by the percentage each institution"

By account. You don't use % now. Basis is a fixed $ amount. If that account is split two ways, then basis is split 50/50. If there are two accounts, it's still all done by $ for basis per account (not institution). It's literally, "How much they paid in."

https://www.napa-net.org/news-info/daily-news/case-week-aggregating-rmds-0

"there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent."

Normally, you can't combine inherited IRA, but since these are from the same owner, they can be combined for each beneficiary. So, your beneficiaries can combine the various accounts they inherit from this person, from different institutions.

As noted, the basis stays with the account. Pub 590B covers this. The section is:

"IRA with basis"

I would also read the section on Miscellaneous Rules for RMD, Separate Accounts, to see if this action should be taken.

[Frustrated-in-IL]

Thank you for your reply but I am not sure you understand the issue.

The taxpayer died with their IRA located at three banks.  But there is only ONE Form 8606.  (I believe you would only have multiple Forms 8606 if distributions were being taken from an inherited IRA and your own; this is not the case here).  These IRAs could have been moved between several banks, combined, separated, etc. over last several decades.  At death, there is basis on Form 8606 of $20000.  Bank A IRA has FMV of $100000.  Bank B IRA has FMV of $100000.  Bank C IRA has FMV of $300000.  The beneficiaries of Bank A and Bank B are three children.  The beneficiary of Bank C IRA is the estate.  Thus, this account is not being split cleanly as in your example.  Everyone agrees the basis of $20000 follows the IRA, which is an IRA with a FMV of $500000 before allocation to beneficiaries.  The question is, given these facts, what is the allocation of basis to the beneficiaries?

I think the only way to determine allocation of the basis to the beneficiaries is by %, or as I said "... then allocating the basis by the percentage each institution held to the overall value at date of death".  Specifically, I am suggesting each of the three children receive $2667 of basis (20000 * (200000/500000)/3).  That would account for $8000 of the basis, with the remaining $120000 going to the estate (300000/500000*20000).  I do not see how the RMD rules you linked apply in this case.

Is there a law/reg/ruling which I am unaware of which covers this and results in a different allocation?