The problem was their IRA. Somebody had to pay the taxes on it which occurred in 2018. That responsibility fell on the 3 people. My share of the asset about tripled my income. What pissed me off is I had to pay a penalty for under withholding. How does one withhold taxes on something you don't know you'll receive?
I'm just ranting because I'm upset. I know this is a one time thing, but you'd think the IRS could wave the penalty in such a situation.
My sister and I inherited an IRA that my parents set up in a trust before they passed (the last one passed in 2004). We were able to roll that over into a Beneficiary Designation Account IRA (BDA-IRA) where we only have to take Required Minimum Distributions (RMDs) based on our ages. So there isn't a big tax hit in one year, but rather smaller ones each year spread over our remaining life expectancies (sort of).
Anyway, in 2018 the divisor was 16.6, meaning I only had to take 1/16.6 = 6.02% of the account's value as an RMD distribution in 2018. (The divisor had started out out at like 29.6 and decreases by 1.0 each year).
The IRA did not have any charities named as cobeneficiaries. I've read that if there are, the part that goes to the people beneficiaries (like my sister and I) must be all distributed within 5 years or something like that, which can produce a big tax hit -- not just because of the amount, but the effective tax rate on it -- it could push one up into a much higher tax bracket.
The portion that goes to charities should not cause any tax issue (other than the part above where it forces the parts designated for the people beneficiaries to have to be distributed within 5 years or whatever).
I'd be shocked if the IRS didn't waive the under-withholding -- as you say, you couldn' reasonably predict your sister's death, and even if you had, you would be in a very tiny group of potential beneficiaries who would have some idea of these ramifications.
At least in the past the IRS has been reasonable in my experience, e.g. my father did not take IRA RMDs (required minimum distributions) in the last 2 years before his death, due to severe cognitive impairment caused by an amazing coctail of medications. (He had been faithfully taking the RMDs in the previous 15 or so years before that).
The penalty for failure to take an RMD (and thus pay the taxes on it) is 50% of the amount that should have been taken -- a huge huge penalty (e.g. if one's RMD is $10,000, the tax penalty is $5,000 -- on top of course of having to take the RMDs for the missed years and refigure and pay the taxes). Anyway, my sister wrote a letter to the IRS, and they entirely waived the penalty. I've read (in the past anyway) that that is not uncommon -- just have a reasonable excuse.
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