Estate IRA

Submitted by CECI DEV on Thu, 2019-05-23 19:36

How can I get information on an estate IRA? The decedent was 92 years old in year of death and had a traditional IRA. No beneficiary. IRA goes into an estate IRA. The bank says it goes into an estate IRA and can then be cashed out. There is more than one heir. How can the IRA be split among heirs? Does the bank who holds the IRA make IRAS for each heir? If the IRA is cashed out, are there federal income taxes on the IRA, like early withdrawl? This is all very confusing and I would like to know the best way to proceed. I saw the following on your site. Please explain further given the circumstances I described above.

“In the second option, death occurs after the RBD.

Here Kate died on September 13, 2013. Now distributions to the estate can be made using the balance of Kate’s life expectancy. Kate turned 71 in the year of her death. The life expectancy factor (from the IRS Single Life Table) is 16.3. When the estate calculates its first required distribution (RMD) it will use a factor of 15.3. You subtract one from the previous year’s factor each year to get the factor for the current year.

Does the estate have to remain open for the next 15.3 years in order to receive the annual RMDs? IRS says no, it does not. When the estate inherits, a properly titled inherited IRA is set up for the estate. Example: John Smith, deceased, IRA fbo (for benefit of) J. Smith Estate

When the estate is closed, the executor or personal representative of the estate informs the IRA custodian that the shares for each beneficiary of the estate should be assigned to inherited IRAs in their names. A direct transfer of inherited IRA assets is done to an inherited IRA fbo each estate beneficiary. This does not change how the RMDs are calculated. The beneficiaries must continue to use the balance of Kate’s life expectancy. Now the estate can be closed.”



Submitted by Alan - IRA critic on Thu, 2019-05-23 21:19

  • Rarely would the executor want to keep the estate open, so the usual solution if the IRA balance is large enough is to assign the inherited IRA out of the estate to individual inherited IRAs for each estate beneficiary, who could then distribute their inherited IRA under the remaining life expectancy of the decedent (3.9 years). They collectively must also complete the year of death RMD of the decedent if it was not completed by the decedent. Therefore, the second option you posted is correct.
  • However, do not expect the bank to be receptive to assignment and they might refuse, particularly when they find out how many estate beneficiaries there are. If the IRA balance is not large and/or if the number of beneficiaries is large resulting in a small balance per beneficiary, it might not be worth the effort to fight with the bank. In this situation, the bank would make the lump sum distribution to the estate as they wish to do, then the executor would pass through the amounts to each beneficiary on a K1 from Form 1041. The estate can then be closed. The downside is that each beneficiary will be individually taxed on their share in a single year. The estate will not be taxed at the higher estate tax rates.

Submitted by CECI DEV on Fri, 2019-05-24 00:58

Thank you.  The bank has already said it only wants to do an estate IRA.  Could I take this estate IRA to another bank who may assign it to individual inherited IRAs for each estate beneficiary?  The value of the IRA is about $82K and 5 beneficiaries one at 10%, the other 4 at 22.5%.  Also, another mistake was made.  3 uncashed distribution checks were found.  The bank said they had to go back into the IRA.  I read the post that they could have been deposited into the estate checking account.  Can I ask for those 3 checks to be re-issued?  The bank was wrong in that the checks were made out to the decedent and could not be put into the decedents estate account because they were not made out to “The Estate of…”.  Checks were around $24.5K in total.  Please advise. 

Submitted by Alan - IRA critic on Fri, 2019-05-24 01:43

  • Yes, you can do a direct transfer to another IRA custodian, if you can find one that will agree to accept assignment to beneficiaries. But a bank custodian is much less likely to agree to that than a brokerage firm, so I would not waste time with banks unless you have some leverage in the form of other business with a bank, such as your own bank. The average interest per beneficiary is only around 16k, and some of them might prefer a lump sum distribution anyway. 
  • Were the uncashed checks issued prior to the death, and have they already been reported on a 1099R?  Were they in excess of the RMD?
  • What is the status of decedent’s year of death RMD? 

Submitted by CECI DEV on Fri, 2019-05-24 02:51

Thank you so much.

  • I will talk to the beneficiaries and see what they prefer.  I will try to do a direct transfer to another IRA custodian if they or some do not want a lump sum distribution.  I have a couple of banks I could try a direct transfer with.  Would I initiate it at the other bank, the new custodian?  If they will not agree, I will try a brokerage firm.
  • The uncashed checks were issued prior to death and have been reported on the 1099R, yes.  They were not in excess of the RMD.
  • The decedent passed in 2019 and there is one check issued (RMD) in Dec 2018 but not found.  The IRA bank says they will cancel the check and deposit it in the IRA if not found and I do not think it will be found.  The amount is around $8.1K.  Can I ask them to re-issue this check and then deposit it in the estate checking account?
  • Should there be a check for 2019 as well?  This is the year of death.
  • If the IRA were cashed out and I would have to pass it on using the 1041, schedule K, it is very confusing.  What line item would be the income from the estate IRA? And wouldn’t I have to wait to get the 1099 from the bank to complete it?

Submitted by CECI DEV on Fri, 2019-05-24 03:08

I should also say that, the IRA is subject to inheritance tax by the state. So, with having to pay federal income tax as well, the amount actually inherited in greatly diminished. 

Submitted by CECI DEV on Fri, 2019-05-24 11:43

I cannot thank you enough. I have a clear idea of the goal going forward. 

  • I will find another bank or brokerage to retitle the IRA correctly for each heir.  Also, I am going to ask for a copy of the IRA agreement from the bank to see why they will not do it. – just so I know and can verify.
  • My other problem is the checks that were deposited.  How can I correct that?  – I do not want to pay a 6% tax on greater than allowed contributions for someone that had passed away and should not have had a contribution to begin with.   

Submitted by Alan - IRA critic on Fri, 2019-05-24 16:04

  • If you find a bank that will accept transfer of the inherited IRA and agrees that they will allow you to assign that inherited IRA to separate inherited IRAs for each beneficiary, you should have the accepting bank process the transfer request from the current bank. The current bank should not resist such a request since they do not want to continue the account anyway. The reason that banks do not like estate IRAs is that they can become exposed to estate litigation problems, and the inherited IRA is a wasting asset that cannot be contributed to, but must be withdrawn over a short period of time in most cases.
  • Since the checks were issued while decedent was living the decedent had constructive receipt of them and perhaps at least some of the amount was needed to complete the 2018 RMD, they should be deposited into the estate account, not returned to the bank. That will leave the 1099R correct as issued and the 2018 return (if filed) also correct with respect to IRA distributions at least. 
  • Whatever the 2018 RMD was, the first dollars distributed are always applied to the remaining RMD. With a 2018 RMD of around 10% of the 12/31/2017 balance, it appears that the total distributed and reported on the 2018 1099R well exceed the 2018 RMD. As executor, you should have the authority to deposit these checks to your estate account since they are part of the estate. As for the still lost check, that will have to have payment stopped and re issued to the decedent and then you can deposit that one into the estate as well. This should be easier for the bank than revising the 1099R and year end 2018 balance. Any state banking regs in conflict with this will take priority.
  • Once the final 12/31/2018 IRA balance is determined, decedent’s 2019 year of death RMD can be calculated. Since you will have the old checks going into the estate account anyway, it is easier to have the current bank distribute that 2019 year of death RMD to the estate. That will avoid the hassle of having each beneficiary deal with their share of this RMD as they are jointly responsible for completing it this year. Paying it to the estate before separate accounts are created (if they in fact are created) is simpler. As executor you would be passing all the estate funds to the proper beneficiary on a K1.
  • You would probably want to hire a CPA to complete the 1041, and while the IRA is modest I don’t know what other assets are subject to probate. In some cases, electing a fiscal tax year for the estate can reduce taxes so a CPA can assist with that decision as well. The state may have it’s own 1041 as well. Therefore, I will pass on providing further advice on the actual 1041/K1 reporting. Unless you have done a 1041 before, I suggest you retain a CPA for this one year.
  • Other than the year of death RMD, I suggest you take no other distributions from the estate IRA until you determine if the account will be accepted by another custodian. If the account can then be assigned to the individuals and the year of death RMD had already been distributed, the individuals will not have to take their first beneficiary RMD (all will have the same divisor calculated using decedent’s age) until the end of 2020.

Submitted by CECI DEV on Fri, 2019-05-24 19:53

Hi, Again, Thank you so much.

  • The current bank has agreed that another bank can transfer the IRA and process the IRAs for the heirs in the way I want according to the will.  I am going to try with the bank that has the estate checking account since they have been very helpful to me so far.  So that is settled.  I will not do anything until either they or another bank can tranfer and title the IRAs properly.  So that is good news!
  • Second as to the RMD checks that were deposited and also the bank cancelled the 2018 check and I did not request it!  So they have the RMD checks.  They have agreed to re-issue the checks payable to the estate.  They will not change the 1099s.  They said they will report to the IRS that this has been done.  I have not done this yet as I need to investigate and write a letter requesting it.  What I do not understand is, how are they going to report it?  Basically, these checks have already been distributed and 1099s issued. They are not taking the checks as a contribution.  So I am confused as to that.  – checks were issued and reported.  they were not cashed.  the bank gave me bad information that I could not deposit them in the estate account because they were not titled to the estate only were only titled to the decedent.  This was wrong, I could have put them in that account.  They were suspicious of me like I was trying to just get the money, meanwhile I presented them with all of the necessary documentation that I was doing my job as executri
  • So, my question is, what kind of tax liability would this set me up for?  It is not income for the estate as they are RMDs from years past.  I can file the income tax for 2018 – the decedent passed early this year.  I can still file the return though and it is not even necessary because the total income falls below the required amount.
  • I will retain a CPA for that year – which would be next year when dealing with the estate return.  
  • I just want to know if I should take the 4 RMD checks issued to the estate and how should the current bank be reporting them?

Submitted by CECI DEV on Fri, 2019-05-24 20:10

Hi,So I talked to the bank and they will code the checks as a death withdrawl on a 1099R to the estate.

Submitted by Alan - IRA critic on Fri, 2019-05-24 20:40

  • If they are re issuing the checks to the estate, they must treat them as replacement checks, not an additional distribution. They should not change the 1099R for 2018, they should not issue new 1099R for 2019, and they should not further debit the IRA balance or a duplicate distribution would result. I assume the decedent has already been taxed on this money for 2018. Therefore, there should be nothing additional for them to report to the IRS. They already reported the 12/31/2018 balance to the IRS reflecting the 2018 distribution checks, so any additional reporting could result in double taxation, first to decedent in 2018 and then to the estate in 2019 when it’s all the same money. You probably shouldn’t argue if they debit the IRA this year for stop payment and re issue processing, but none of that is reported to the IRS or on a 1099R.
  • Are you sure the total income for 2018 for the decedent falls under the filing limit for a single taxpayer? Are the 1099R forms for the decedent correct, reflecting all distributions including the uncashed checks you have and the check that was lost? 
  • RMDs are not reported any differently than any other distribution. It sounds like the 2018 RMD was exceeded by a considerable amount if this was the ONLY IRA owned by the decedent. Again, any additional reporting the bank does as a result of the 4 new checks is going to create several new problems, so the re issue cannot be reported on a 1099R or deducted from the gross IRA balance, since this has already been done. If no additional reporting, you could just deposit the checks into the estate account. It would be the same result as if the decedent had deposited the checks into a checking account and that checking account then became part of the probate estate. 
  • Once this is done, then you can initiate the transfer process with the new bank. If the estate is otherwise simple enough, you should be able to close it by year end. Of course, if inherited IRAs are set up for the beneficiaries, any distributions they take will not affect the estate, or the 1041.

Submitted by CECI DEV on Fri, 2019-05-24 21:32

Hi,

  • So, yes, I will have to file a federal income tax return for 2018.  Just above the threshold.  This is the only IRA and then social security which is a very small amoun, so no tax due.
  • I totally agree with the check re-issue and treating them as replacement checks and not an additional distribution.  It even has to be for logic.  Firstly, the checks should not have been deposited because you cannot make a contribution to an IRA after someone has passed away.  Secondly, it is the same money and how would you show that its the same money using forms such as the 1041and so on?  Thirdly, I have the date of death balance of the IRA, copies of the distribution checks they deposited and receipts of deposit into the bank. (at the time I was not aware they were putting the checks into the IRA, they just said, we have to deposit those.)  So, I could make an argument as to what happened.  So, how do I get them to treat them as replacement checks and not an additional distribution.  They tell me that the checks were already deposited, that they can’t just leave them out there in nothing.  
  • So, in summary, how can I make sure the bank treats the checks as re-issue and not a withdrawl?  Plus here after the date of death, a deposit and then a withdrawl  within less than a month?  It just doesn’t make sense. 
  • I would like this to happen becacuse it is 1. the simplist 2. a correct reflection of what happened. 3. i can close the estate easily myself. 4. i can file tax forms.  5. satisfies the IRS and the estate and most importantly, the decedents rights and wishes which I am trying to uphold.

Submitted by David Mertz on Fri, 2019-05-24 22:43

If the bank insists on issuing a code 4 2019 Form 1099-R to the estate, corresponding to the reissued checks, they must also issue a corrected 2018 Form 1099-R to indicate that this money was *not* distributed in 2018 and they must issue a corrected 2018 Form 5498 to include this money in the reported year-end FMV.  It makes no sense for them to do that, though, since it’s far easier for them to just reissue the checks with no reporting on a 2019 Form 1099-R.

Submitted by CECI DEV on Fri, 2019-05-24 23:17

Makes sense for the 2018 check.  What about for the other 3 years? 2015, 6 and 7?I will have to try and speak with someone else at the bank and if necessary retain an advocate because all of this seems very straight forward regarding re-issuing the checks and I am not sure why they are reluctant.  The person I spoke with said that this has not happened to them before and I think that is why.  

Submitted by Alan - IRA critic on Sat, 2019-05-25 02:18

Now I see why the taxable income for 2018 will be lower – up to now I assumed that all these checks were distributed in 2018, not in prior years. Because of issue date, the checks are stale and probably were not negotiable as a result, so they HAD to be reissued. Decedent has been paying taxes on money all along that was never deposited.  The replacement checks can be issued to the estate as long as no 1099R is issued. If the bank’s processing platform cannot handle this without a 1099R, then they should issue the checks to the decedent as pure replacements with no reporting, and send them to you for deposit into the estate account. If this is a small bank without experienced staff, they must have other resouces they can check with that are able to understand that there are RMD issues and taxes already paid based on prior 1099R forms.

Submitted by CECI DEV on Sat, 2019-05-25 04:19

I went to the bank to ask if the checks were still good.  They told me they had to take the checks and told me I had to sign the checks.  I did not know they were depositing them into the IRA account.  This was wrong.  They should not have done that.  The checks should have only gone into the estate account.  The checks could not have been stale otherwise they wouldn’t have done that.   Is it possible to reverse this and have the checks re-issued?  They haven’t done anything with the 1099s in their system yet although they were going to make it seem like the checks were never issued and reverse the 1099s.  I don’t see how they could do that.

Submitted by CECI DEV on Sat, 2019-05-25 04:32

Plus, I never asked them to deposit the 2018 check.  When the woman on the phone said she could re-issue the checks and what about the 2018 check, I said to re-issue that too after she checks.  She was going to check on things and get back to me.  Then after all of the they ca’tissue checks to dead people talk, she told me she already cancelled that check and deposited it.  I said I never asked her to do it and she said the money has to go somewhere, it can’t just be out there.  If anything, this 2018 check needs to be re-issued.  And before, she told me they could re-issue the checks.  Their problem is re-issuing the checks to a dead person, which they say they cannot do.  I wonder if that is true.  I don’t think they can take a contribution to an IRA of a dead person either.  

Submitted by Alan - IRA critic on Sat, 2019-05-25 17:45

I think what they are doing is voiding the 4 checks and re issueing the total amount in a check payable to the estate. You can then deposit it in the estate account. The replacement check offsets the voided checks so the IRA account balance should not change when all is done. Of course, you need to check the IRA balance to make sure it is correct. They also cannot report the replacement check as a distribution to the estate since these amounts were already reported and taxes paid (I assume) in prior years.  That would leave things as they should be with the money from these IRA distributions in the estate account for you to distribute according to the will (or state intestate provisions if there was no will). Also, note that this is the same end result as if the decedent deposited the checks in their checking account and then passed. The checking balance would be part of the estate as it will be once the bank issues replacement checks. 

Submitted by CECI DEV on Sat, 2019-05-25 18:45

They are not doing that.  The checking account was closed.  They took the checks and deposted them in the IRA.  I signed the checks, they told me I had to.  Behind the scenes they were trying to make it look like they had never been issued.  When I called to ask if the IRA could be transferred to another bank who could retitle it the way I asked for it to be to beneficiaries, they said that yes it could.  That is when I found out about the checks. I asked for them to be re-issued and at first she said they could then later came back and said they could not do that, they could not issue a check to a dead person and cited regulations as the reason.  So, here I am.  They say they will do a death distribution for the amount of the checks if I write them a letter asking them to do so.  The check will be to the estate and they will do a 1099 to the estate.  Its not replacing the checks.  Its not right.  I have the copies of the checks that says they were distributions for the years.  The checks were distributed.  They had not been cashed.  I asked for a copy of the 1099 for the 2018 check.  She told me she would mail it to me when she got the letter from me.  Its not right. I can do the 2018 return.  It will be late.  My parent was passing away early this year and so not done.  It is my understanding that returns can be done late.  no tax is owed.

Submitted by Alan - IRA critic on Sat, 2019-05-25 20:51

Sounds like they are replacing the checks, payable to estate  instead of to decedent. That’s OK, but they should NOT be issuing another 1099R for this. This money has already been taxed and reported distributed. Any 1099R  that they might issue for the replacement check this year will result in double taxation, so you need to make sure they understand that and agree not to issue the 1099R next January.

Submitted by CECI DEV on Sat, 2019-05-25 21:02

Hi, I will try to make them understand but what I said earlier is what they will do as of the phone call late yesterday afternoon.  I have to talk to someone else in the bank, perhaps a compliance officer or lawyer.  I also need to talk to the IRS, I think.  I agree, its fine to issue the checks payable to the estate – its the same thing, either way they get deposited in the same account and split up according to the will.  I want the checks replaced and no 1099 so that I can move forward and take take of the IRA and be done with this bank.  I just don’t understand why they will not do it.  

Submitted by CECI DEV on Sun, 2019-05-26 00:06

is it because they think that taxes were ot paid that they will not issue replacement checks?  they do know that 1099s were issued.  seems like that part is out of their scope.  that is the responsibility of the taxpayer and the IRS not the IRA custodian, is that correct?

Submitted by Bruce Steiner on Sun, 2019-05-26 01:47

  • The lawyer handling the estate should be advising you (and your accountant) on this.
  • If you set up an inherited IRA at another financial institution (make sure to have the new one collect the money directly from the current one since there’s no 60-day rollover except for IRA owners and their spouses), the executor can then direct the new financial institution to transfer it to inherited IRAs for the beneficiaries.  But since the IRA owner’s life expectancy (as if she hadn’t died) is so short, it might be easier to keep the estate open.  That will let you offset administration expenses against the IRA distributions.  You’ll also be able to select a fiscal year if that’s helpful.
  • Bruce Steiner

Submitted by CECI DEV on Sun, 2019-05-26 12:02

Hi, There is a lawyer who drew up the will in 2011.  I met with him but he has not advised me further on the estate.  I did not think it was that complicated because she had some bank accounts and that’s it.  The IRA is the biggest thing and if another bank sets up a direct transfer and correct titling, that would handle the IRA as she wished.  My bigger problem now is the checks.  I made a mistake.  I went to the bank and asked if the checks could be deposited into the estate checking account which was set up at a different bank.  I wanted to make sure the checks were still good, I did not want to try to deposit them and then have them not be good.  They told me I had to give them over and that we would handle it at the time we handled the IRA.  I have since found out everything above.  I think they never should have taken the checks, they should have told me they were good and that’s it.  Now, I am stuck with trying to convince the bank to issue replacements checks with no 1099.  I can get a lawyer to help.  I can try with the lawyer who drew up the will.  I really only want those checks re-issued as replacements and that is it.  Plus I never told them to stop payment on the 2018 check and they did and they refuse to send me a copy of the 2018 1099.  So the bank has made some mistakes as well.  What was mentioned above sounds interesting – to keep the estate open and offset administration expenses against distributions.  Would that be for 4 more years?  She would have been 92 this month.  The will stated she wanted things handled in a timely manner.  I think I would rather have everything closed out if I can get the checks replaced.  I don’t know how any accountant could show that the money they intend to distribute and tax is the same money that would distributed in prior years and taxed.  Logically it seems there should be no tax due. By the way, I have found some copies of tax returns which were filed for the years of the checks.  And I can file for 2018 and if there is a missing year, the tax return can be filed to the IRS.  That is on their website and it does happen according to what is written there.  Then I will have to file her final return in 2019.  There is no tax due because the checks were her only income besides social security which was small and with the deductions her income is not taxed. 

Submitted by CECI DEV on Sun, 2019-05-26 13:00

If the IRA bank did a death distriubtion to the estate for the amount of the checks and filed a 1099, that would be reportable on the estate returns as income in respect of a decedent, if I understand correctly.

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