Designated Beneficiary if IRA used to pay Estate Taxes
Hello:
I know that an IRA has to have designated beneficiaries (or a qualified trust) named in order to use the life expectancy of the designated beneficiaries after death to get the stretch.
I also know that if the IRA assets are going to be used to pay estate obligations (such as estate taxes) that the estate can be considered a non-designated beneficiary. In situations where there is a non-designated beneficiary (such as the estate), I understand that the beneficiaries of the estate cannot be treated as the designated beneficiaries of the IRA.
My question is this: if the IRA has named designated beneficiaries, but the IRA must also (even though it is not recommended) be used to pay estate obligations, is the IRA considered to have valid DB’s who can use their life expectancies to get the benefit of the stretch?
Thanks very much. Always appreciate your valuable comments and suggestions.
Permalink Submitted by Alan Spross on Sun, 2009-01-25 03:32
Yes, the designated beneficiaries can still use their individual life expectancies for distributions, however if the estate taxes are sufficiently large, the estate taxes due would accelerate the distributions.
For example, if half the IRA balance was needed to pay estate taxes, this amount would be distributed in short order, but the remaining half could be stretched.
Permalink Submitted by fairira on Wed, 2009-01-28 00:56
1. Is this an instance of (a) the estate being a “non-designated” but actual IRA beneficiary where the estate executor will pay the estate taxes, or (b) the designated beneficiaries accelerating their distributions to have enough assets to pay the estate tax?
2. If it is (a), and if the estate’s share is not fully withdrawn by Sept. 30 of the year after the year of the IRA owner’s death, can the other beneficiaries still be designated beneficiaries who can use their individual life expectancies for their subsequent distributions?
Permalink Submitted by Alan Spross on Wed, 2009-01-28 03:09
1. (b)
2. Not applicable
Permalink Submitted by Louis Napoli on Wed, 2009-01-28 03:57
Mr. Oniras is correct. The answers are as follows:
1. (b), and thus
2. Not applicable
Permalink Submitted by Jose Morales on Wed, 2009-01-28 17:56
And to clarify, this would be a distribution that the beneficiary/beneficiaries make to pay estate taxes and the distribution would be reportable to the beneficiary/beneficiaries, not to the estate?
Permalink Submitted by mk foss on Wed, 2009-01-28 18:03
There is an old ruling that said even if the funds to pay estate tax are withdrawn directly from the IRA, the income is taxed to the beneficiary.
It’s impossible to escape taxes!
Permalink Submitted by Alan Spross on Wed, 2009-01-28 19:49
And the IRD deduction helps, but the IRA beneficiary would have received it without having to directly pay the estate tax, so it’s not much consolation.
Permalink Submitted by charles lore on Thu, 2009-01-29 01:25
So I can be clear I’d like to apply an example:
Owner dies Feb 1 2009. A,B,C are beneficiaries all non spouses. Balance is 1,000,000 and 200,000 in estate tax is needed on Oct 1, 2009. A,B,C have not yet split IRA since they’ll do it next yr.
1) who would custidian most likely accept instructions from? An executor who is neither A,B of C or alll 3 benes or what?
2) On whose 1099 will the income be recognised?
Permalink Submitted by mk foss on Thu, 2009-01-29 02:16
In your example, the custodian should not take instructions from the excutor because the estate is not the beneficiary.
Before the account is split, the beneficiaries could agree that a check be made payable to the Internal Revenue Service from the IRA. In usch a case the 3 of them would each receive a Form 1099R.
The more direct way would be for each beneficiary to request a distribution of one-third of the amount needed. Then they could transfer the funds to the executor to be used to pay the tax.
In my experience, it takes a while to determine the amount of the tax so quite often there is a last minute scramble and a check to the IRS is requested.