Estate as IRA Beneficiary
A fifty-two year died with his estate named as the beneficiary of his IRA and his mother named as the executor and sole heir of the estate. The IRA is held at a brokerage firm as IRA FBO Decedent’s Name FBO Decedent’s Estate. I believe the five-year rule applies, but who pays taxes, the estate or the decedent’s mother? If it’s the former, is the estate required to file 1041s over the years that distributions are taken?
Mom has said that she wants the IRA to go to her daughter. The broker is telling Mom that they can set up an inherited IRA for her daughter, transfer the account, and that her daughter can then stretch the IRA. Wrong, right? It seems to me that they’re stuck with the five year rule and that any money that comes out of the IRA becomes taxable no-longer-qualified dollars. At that point, Mom could give the proceeds to her daughter but not in the form of any IRA. Am I missing something?
Permalink Submitted by Alan - IRA critic on Thu, 2016-02-18 16:35
Correct about the 5 year rule. Typically, the executor (mother) would not request any distributions to the estate, and within a few months close the estate and have the inherited IRA assigned to herself as the estate beneficiary. She is still subject to the 5 year rule and would pay taxes at her own rate as she took distributions. If the IRA is large enough and state intestate rules would result in the IRA going to the daughter if Mother disclaimed, a disclaimer might be considered. That is the only way an inherited IRA for the daughter could be established but would not alter the 5 year rule. For a smaller IRA, mother could assign the IRA to herself, take distributions and gift a tax adjusted amount to the daughter. Annual gift exclusion is 14k.
Permalink Submitted by Bob Foland on Thu, 2016-02-18 16:54
I’m not clear about your mention of intestate rules since the decedant died with a will that left everything to his mother. Can intestate rules apply when a decedant has a will? If that’s possible, I would imagine it would be a state-by-state thing.
Permalink Submitted by Alan - IRA critic on Fri, 2016-02-19 01:13
If mother is able to disclaim her interest in the IRA, then there is no will beneficiary and estate would pass the IRA according to state intestate provisions.