No Designated Beneficiary
I have a client whose father passed away in April 2010 with two IRAs, both with no designated beneficiaries. The estate became the default beneficiary. Father was 72 when he passed away and had been taking RMDs. An RMD was not taken prior to death, but was distributed to the estate in December 2010. In late January of this year (2011), the remaining balance of the IRA was distributed to the estate. The checks were deposited into an estate checking account and have cleared. Are there any options at this point to avoid a fully taxable distribution?
Permalink Submitted by Bruce Steiner on Fri, 2011-03-04 16:28
If there is a surviving spouse, the spouse may be able to roll it over into her own IRA. See my article on this subject in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf .
If not, the beneficiaries may wish to discuss with counsel whether they have a claim against the executors for any lost tax benefits; and the executors may with discuss with counsel whether they have a claim against anyone for any lost tax benefits.
Under the Administration’s Fiscal Year 2012 Revenue Proposals, a nonspouse beneficiary would have 60 days to roll a distribution over into an inherited IRA. Under this proposal, this provision would become effective for distributions after 2011. However, this provision has not yet been enacted; and even if it is enacted, it would not apply to a distribution in 2011.
Permalink Submitted by Alan Spross on Fri, 2011-03-04 16:54
Without a surviving spouse rollover, this apparent error erased an approximate distribution period of 16 years to the estate or estate beneficiaries to which the IRA might have been assigned when the estate terminates. I don’t know if there is a generally accepted method of calculating damages in this situation, but it will be much worse if the estate pays the income tax at the compressed rates.
Permalink Submitted by Bruce Steiner on Fri, 2011-03-04 17:02
There is no way to calculate it precisely. No one knows what the future investment returns will be, or what the future tax rates will be. They’ll have to estimate it as best as possible. But that’s the case in lots of situations where someone is trying to show economic losses.
If the estate is in a higher bracket than the beneficiaries, the executors might (or might not) be able to mitigate the loss by making distributions in the same taxable year.
The executors may also be able to use administration expenses to offset some or all of the income.
The executors will also have to take this into account in selecting a fiscal year (unless they have already filed the first fiduciary income tax return).