Death With No IRA Beneficiary & No Will
Client comes to me last week and says he is the executor of his brothers estate. He wants advice on IRA management.
Brother died without a beneficiary designated on his IRA.
No will.
By default in California I believe the estate is the beneficiary and the probate court decides who receives the funds “per stirpes” (I think). I will call the estate attorney next, but I think the brothers parents are the beneficiaries.
Parents are not wealthy so they could use the money as I understand it.
I am thinking the IRA will go to the estate as income on the fiduciary income tax return (Form 1041). But the good news is there will be a deduction for a distribution to the parents and then the parents who don’t have much income will be taxed on it.
Does this sound right?
Are there any options?
Thanks for your comments.
Glenn
Permalink Submitted by Alan Spross on Wed, 2007-10-17 01:01
Glenn,
The IRA agreement should first be consulted to determine the default beneficiary, since CA law would not override the agreement itself. The default beneficiary would likely be either any surviving spouse or the estate. If it develops that the estate is the resulting beneficiary, the estate should be probated under CA intestate provisions per link below. It appears that the parents only receive the IRA after any surviving spouse or domestic partner or issue of the decedent.
It sounds like decedent passed prior to his RBD and therefore the 5 year rule applies if the estate is the beneficiary. If the estate then closes prior to any distribution the IRA can be assigned directly to the estate beneficiaries under the intestate provisions. Your client may have some work to do to document potential beneficiaries, and meanwhile the IRA custodian under the IRA agreement may be able to just distribute the balance to the estate and let the estate pass it through on a 1041/K1. This is another aspect dependent on the IRA beneficiary clauses which should be thoroughly reviewed.
http://www.finance.cch.com/pops/c50s10d190_CA.asp
Permalink Submitted by Glenn Hammill on Wed, 2007-10-17 22:17
Alan,
Just confirmed with the probate attorney, that the parents are in fact the sole estate beneficiaries.
Lets say we want to go for the 5 year plan, 20% a year.
Lets also say the probate attorney is ready to close the estate.
Does the estate have to stay open until the IRA is liquidated?
Or, will the IRA custodial recognize what the probate court says and put the parents on as the beneficiary.
Thanks,
Glenn
Permalink Submitted by Alan Spross on Thu, 2007-10-18 00:01
No, the estate does not have to stay open, but you may run into some resistance from the IRA custodian, who would find it easier to simply issue one check to the estate and be done with it. Good for them, but not for the parents here.
Attached is a link that discusses this issue further including the need to possibly transfer the entire IRA to another custodian who will cooperate with the 20% per year distribution plan with the obvious tax advantages. Also, a sublink containing sample letter.
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Glenn Hammill on Thu, 2007-10-18 00:40
This is fantastic.
Thanks,
Glenn
Permalink Submitted by Glenn Hammill on Thu, 2007-10-18 00:44
I learned there is a 401K too. This will be different, won’t it?
I can’t set up an IRA for the decedent.
Glenn
Permalink Submitted by Alan Spross on Thu, 2007-10-18 01:13
Yes, the 401k is subject to it’s own default beneficiary provisions if there was no named beneficiary on the plan. But after determining the plan provisions, the prior process could also be applied in dealing with the 401k plan administrator, but don’t expect any consistency between how the 401k plan reacts vrs the IRA custodian.
The amounts inherited under these plans would seem to be key in determining whether the estate should consider staying open. The estate beneficiaries may still be able to get 20% per year distributed to the estate, and then pass the amounts through on a K1 to the beneficiary, but is it worth the added costs and the 1041 that will need to be filed each year vrs taking one or both of these plans as a lump sum to the estate in the first year, then closing the estate. Client will have plenty of issues to consider, probably deserves executor fees!