IRA inherited from estate
My father died in May 2007 at age 77; his IRA’s sole beneficiary was my mother, who died in Dec. 2006. (There was a living trust, but he had been told IRAs and other accounts with named benes couldn’t be retitled in a trust’s name.) There were no contingency beneficiaries; his six children are all equal beneficiaries of his estate.
We are getting conflicting advice as to whether we can set up inherited IRAs and distribute via children’s life expectancy or whether we need to distribute all funds within five years.
I’d appreciate any thoughts/advice. Thanks.
Permalink Submitted by Bruce Steiner on Sun, 2007-12-16 16:37
Neither is correct. If neither of the lawyers you consulted is familiar with this, you may wish to consult with another lawyer who is more knowledgeable in the tax/estates area.
If he had named his children as beneficiaries, they could have set up inherited IRAs and stretched it out over their life expectancies.
If he had named trusts for the benefit of his children, assuming all of the requirements had been met, the trustees could have set up inherited IRAs and stretched it out over the life expectancies of the children, or (more likely) the life expectancy of the oldest child. See my article on this subject in the March 2004 issue of the BNA Tax Management Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
If the IRA is payable to the estate, and if, as in this case, he had already reached his required beginning date (generally the April 1 after the year in which he reached age 70 1/2), then the estate can stretch it out over his life expectancy as of his death (as if he had not died). That’s not a great result, but it’s better than 5 years.
If he had died before his required beginning date, then the estate would have had to take the benefits by the end of the fifth year following his death. By using a fiscal year, the estate can spread the income out over seven taxable years.
Perhaps what he was told was that he couldn’t transfer the [i]ownership[/i] of the IRA to his living trust. He could certainly have named his living trust (or, better yet, his children, or trusts for the benefit of his children) as [i]beneficiaries[/i] of his IRA.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Alan Spross on Sun, 2007-12-16 21:14
With respect to your current situation, you should first determine that the estate is indeed the default beneficiary under the IRA agreement. It probably is given that your mother had already pre deceased your father. But this should be checked out to eliminate the possibility that the children were default beneficiaries under the IRA agreement.
Returning to the probable reality that the estate IS the default beneficiary, Bruce has clarified that your father’s remaining non recalculated life expectancy would apply because he passed after his RBD. That will provide roughly a 12 year distribution period for the IRA. But right now you need to determine if your father had taken his 2007 RMD in full prior to passing. If not, the estate should request the balance to be distributed to the estate to fulfill the 2007 RMD requirement. You should also determine whether your father ever made any non deductible contributions to his IRA reported on Form 8606.
The above scenario does not mean that the estate needs to be kept open for 12 years. When it can be terminated, the IRA can assigned to the remaining beneficiaries in inherited IRA account status, but each beneficiary will remain subject to your father’s remaining 12 year distribution schedule as a minimum. Those that want to distribute their share faster can do so. Until the estate can be terminated, distributions will have to be made to the estate and passed through to beneficiaries on a K1. That will make the distributions taxable to each beneficiary including any 2007 RMD that your father did not get to take.
As Bruce indicated, you all need to be getting better advice than your Dad did on this matter.
Permalink Submitted by John Underriner on Tue, 2007-12-18 01:41
Thanks for the info. We made the 2007 RMD to the estate, which is the default beneficiary, after his death. There were no 8606 contributions. Since the 2007 RMD is presumably taxable to the recipients in the year the distribution was made (i.e., 2007), I’m assuming there is no benefit in waiting until 2006 to actually distribute the funds to the benes, correct? Thanks again.
Permalink Submitted by Al Fry on Tue, 2007-12-18 01:52
That would be tough to do.
Permalink Submitted by Bruce Steiner on Tue, 2007-12-18 01:57
Your assumptions are not necessarily correct. There are various choices which would allow the income to be taxed to the estate, to the recipients in 2007, or to the recipients in 2008.
Any law firm with a tax/estates practice should be able to advise you as to the income tax planning. I again suggest that you consult with competent tax/estates counsel.
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We made the 2007 RMD to the estate, which is the default beneficiary, after his death. There were no 8606 contributions. Since the 2007 RMD is presumably taxable to the recipients in the year the distribution was made (i.e., 2007), I’m assuming there is no benefit in waiting until 2008 to actually distribute the funds to the benes, correct?