Using Decedent’s IRA to pay Estate Bills?
Can an executor choose to use IRA money to settle estate debts. Example: if the estate is below the estate tax threshold, low income (< $35,000), and the IRA balance is small ($25,000) and all beneficiaries would be taxed at a higher income rate, wouldn't they all be better off to use IRA money to pay estate bills and funeral expenses. This would leave more non-IRA money for tax-free inheritance and the IRA would be taxed at a lower rate?
I understand the IRA could be stretched, but simply for the purpose of using it up front if desired, can the IRA be used to pay bills if beneficiaries are designated?
Permalink Submitted by Jose Morales on Thu, 2015-05-28 16:28
If beneficiaries are designated on the IRA then any withdrawals from the IRA will be reportable to those beneficiaries, specifically whichever beneficiaries request the withdrawals. The 1099-R will be issued to them regardless of what purpose they state the funds will be used for. If the IRA agreement states that in the event there are no beneficiaries the default is the estate, the named beneficiaries can disclaim their stake in the IRA. If they do this they cannot then benefit from the funds in the IRA, meaning any funds left over from paying the estate bills could not then be disbursed to the original IRA beneficiaries.
Permalink Submitted by Ben Meyer on Fri, 2015-05-29 05:54
If beneficiaries other than the estate are designated to the IRA custodian, the executor will have no access to the funds of the IRA. When a beneficiary is designated (other than the estate) the IRA passes outside of the estate. If the persons designated as IRA beneficiaries are also legatees of the estate, the executor could ask them to voluntarily pay the estate expenses. However, this doesn’t seem to present any advantages, since the estate will lose the deductions, and the IRA beneficiaries would probably not be able to deduct the same expenses. The deductions are more valuable to the estate than to individual taxpayers since the fiduciary tax rates rise to the maximum much sooner than individual tax rates (around $11.5K), if income is not distributed in the same tax year.