Undoing an estate IRA distribution

Submitted by Larry Gatewood on Sun, 2017-10-08 00:42

My wife (age 58) recently received an inheritance from her elderly aunt. There were two beneficiaries of the estate: my wife, and another elderly aunt who served as the Personal Representative (PR) for the estate and used her own attorney as the trustee to do the accounting for the estate.

My wife received a Schedule K-1 for the period 12/20/15 to 8/31/16 which reported approx. $86,000 on Line 5 from an IRA distribution. She received a second K-1 for the period 9/1/16 to 7/31/17 which reported approx. $140,000 on Line 5 from an IRA distribution.

The trustee apparently made the decision to distribute these IRAs instead of transferring the assets to an inherited IRA for my wife. Since my wife was not controlling the process of settling the estate, is there any way that she can undo the IRA distributions so that she doesn’t have to pay taxes on the $86,000 and $140,000 which are now being reported as income on the K-1?



Submitted by Alan - IRA critic on Sun, 2017-10-08 03:07

Sorry, no way to undo this. The PR and her attorney made an error, because even if the stretch would have been quite short, assigning the IRA to the beneficiaries would have prevented the increased taxes on the sizeable distribution amounts. At least, due to the estate using a fiscal year, the first K 1 is reported on your 2016 return and the last one on your 2017 return. It is unfortunate that so many people fail to name individual beneficiaries for their retirement accounts. 

Submitted by Bruce Steiner on Mon, 2017-10-09 22:12

  • How does a trustee fit into this?
  • If the IRA was payable to the individuals, then the personal representative could have collected it?
  • If the IRA was payable to the estate, then (assuming that the IRA owner had reached her required beginning date, generally the April 1 following the year in which she reached age 70 1/2) the estate could have stretched the IRA over the IRA owner’s life expectancy as of her death (as if she hadn’t died).  Alternatively, the estate could have distributed the inherited IRA in kind to the beneficiaries of the estate.
  • If the IRA owner was elderly, the stretch might not have been very long.  However, it would have avoided bunching the income, which might have saved some taxes.
  • If the amount involved is sufficient, the beneficiaries might want to consult with counsel to see whether they might have a claim against the personal representative for any lost tax benefits.  Similarly, the personal representative might want to consult with counsel to see whether she might have a claim against anyone. 
  • Bruce Steiner, attorney, NYC, also admitted in NJ and FL

Add new comment

Log in or register to post comments