Estate as Beneficiary
There have been some great posts on this, but I want to make sure I understand how to handle my Dad’s IRA, given that I am the executor.
My Dad died in 2006 after taking his RMD for that year. He left his IRA without listing any beneficiaries. The probated will lists his four children as beneficiaries of the estate. I have transferred the IRA to an Inherited IRA in the name of the estate with the IRA holding company. I believe the IRA has to be distributed among the four of us before 12/31/2007.
How do I handle the assets (stocks/bonds/mutual finds/cash) within this Inherited IRA? Would I liquidate the few remaining non-cash holdings and have the company holding the IRA to create four separate Inherited IRA’s, and fund each equally with the cash?
How do I then instruct my siblings to take the assets? Can they take them over their lifetimes, or is there a five-year thing going on, or maybe there is some other requirement. Is there anything else I am forgetting?
Thanks.
Bryan
Permalink Submitted by Alan Spross on Thu, 2007-08-16 18:20
Bryan,
Since your Dad passed after his required beginning date (April 1 of the year following the year he turned 70.5), the IRA does not have to be distributed any faster than his remaining life expectancy had he lived. For example, if his 75th birthday was in 2006, the distributions can be spread over 13 more years starting in 2007. Where are you getting the impression that the deadline is this year?
Also, when do you plan to terminate the estate? If prior to the end of this year, you should talk with the custodian to see what documents they require to assign the IRA to the individual beneficiaries and create separate account for each of you in the correct shares per the will.
It will be easier if you all agree to convert everything to cash before the separate accounts are created, as that will make it easier for those that want to to transfer their account to another custodian, perhaps the one they have other investments with. Each of you must then take your RMD for 2007 which will be your share (25%) of the RMD required based on the 12/31/06 account balance. Should you all agree, the current shares could be split into the 4 accounts. It will be simpler to do one of the two rather than mix and match for each beneficiary.
If the estate is going to stay open beyond this year, the 2007 RMD will have to be paid to the estate and then distributed to each beneficiary on a K1 form produced with the Form 1041 estate income tax return. Each beneficiary would report the income on their own tax return.
If I have assumed anything incorrectly, eg your father’s age, please advise.
Permalink Submitted by Bryan Schuck on Fri, 2007-08-17 03:17
Thank you for your thorough and prompt reply.
Honestly, I could not find a reference to where I got the idea that there was a deadline this year. Maybe I misunderstood that one has to begin taking out of the IRA by the end of the year following one’s 70.5th birthday. Maybe because we will be responsible for a 2007 withdrawal by Dec. 31st. You are correct that my impression was misinformed.
That having been said, I don’t have a plan to terminate the estate as such. I’d like to seperate the assets and have done with it sooner rather than later. My interest at this time is motivated by my misunderstanding (above) and the pending sale of his house (the other major asset). I did contact the custodian today to get the forms to create the seperate accounts, as you suggested, and to ask them some questions.
You were right on regarding my father’s age (he would have been 76 had he lived two more weeks). I did ask the custodian what schedule I would use (and what schedule I would tell my siblings to expect to use) regarding withdrawals. They said we should all withdraw based on our individual life expectancies. However, I am trying to make sense out of IRS Publication 590. It states the following:
Beneficiary not an individual. If the beneficiary is not an individual, determine the required minimum distribution for 2007 as follows.
• Death on or after required beginning date. Divide the account balance at the end of 2006 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix C. Use the life expectancy listed next to the owner’s age as of his or her birthday in the year of death, reduced by one for each year after the year of death.
Example. The owner died in 2006 at the age of 80. The owner’s traditional IRA went to his estate. The account balance at the end of 2006 was $100,000. In 2007, the required minimum distribution was $10,870 ($100,000 ÷ 9.2). (The owner’s life expectancy in the year of death, 10.2, reduced by one.)
So I’m a little confused. Would I use my life expectancy, my Dad’s, or my Dad’s minus one (or something else).
Once I split up the IRA to my siblings, we would all be responsible for our own tax burden on the withdrawals, just as you explained in the case where the estate stayed open and the withdrawals were paid to the estate. Right?
I hope this is clear. Thanks again.
Bryan
Permalink Submitted by Alan Spross on Fri, 2007-08-17 03:52
You would all use your Dad’s divisor and reduce it by 1.0 each year. The info the custodian gave you about your own life expectancies was incorrect as that would only apply if you were directly named as designated beneficiaries. Perhaps the custodian forgot that the estate was the actual beneficiary, technically meaning that there were no DESIGNATED beneficiaries. If your Dad would have been 76 on his birthday in 2006, the divisor for 2007 would be 12.7 less 1.0 = 11.7. For 2008 it would be 10.7 etc. Therefore, you will have 12 years over which you can spread the distributions, but you can always take out MORE than the RMD if you wish.
What I do not know is whether you can have the IRA custodian assign the IRA to each beneficiary while the estate remains open. If they insist on paying the RMD to the estate, the RMD schedule does not change, but then you will have to run the income through the estate and Form 1041 and distribute each share of the RMD to each estate beneficiary on a K1 form. The mechanics of assigning the IRA to the beneficiaries of the estate may depend on the probate law of your state and the IRA custodian’s business practices relative to this issue.
Both prior to and after the IRA may be assigned the net result is the same with respect to income taxes. Each beneficiary will report their share of the RMD or other distribution on their own income tax return and pay taxes at their own rates. While the estate itself could pay taxes, those rates are much higher and that should be avoided.
Final detail – you should check to see if your father ever made non deductible contributions to his IRA at any time. This can be determined by looking for Form 8606 on his tax returns. If you find that he made such contributions, each of you will get your share of his tax basis and some of the distributions would be tax free. If he had his taxes done by the same preparer for years, that’s the first place to go to get that information.
Permalink Submitted by Bryan Schuck on Tue, 2007-08-21 03:51
Alan,
Thanks for your perfectly clear and helpful reply. I understand from my lawyer that we can split up the IRA while the estate is still open, and that the custodian will do that for us. Your reply is just what I needed.
Thanks again!
Bryan