IRA to Estate

Submitted by Susan Comegys on Tue, 2019-11-05 17:08

The decedent’s estate was the beneficiary of his IRA. The IRA balance was inadvertently issued by check payable to the estate, which was immediately provided to the custodian who opened an inherited IRA account in the name of the estate. The proceeds will ultimately be distributed to the residuary beneficiaries named under the decedent’s Will. In an article I just read, it stated: “Movement of IRA funds to a beneficiary IRA for a non-spouse can only be done by trustee-to-trustee transfer since a distribution from an IRA to a non-spouse beneficiary is not eligible for rollover.” The fact that the check was issued, does this constitute a taxable distribution?
Thank you!



Submitted by Alan - IRA critic on Tue, 2019-11-05 17:48

Yes, this is a taxable distribution if the payee was the estate or executor of the estate. And it was aggravated by the error of rolling it over when it was not eligible, so there are double errors.  There is no way to avoid the taxable distribution and loss of any stretch UNLESS the first custodian is solely responsible for this error and even then the error has been aggravated by the second custodian accepting a rollover contribution for a distribution not eligible for rollover. Both errors together make this extremely difficult to unravel even if the first custodian admitted to this being their sole error. Otherwise, the rollover deposit to the inherited IRA must be removed from that IRA with all earnings as an excess regular IRA contribution and returned to the executor. That will produce a second 1099R from the inherited IRA, but only the earnings should be taxable on that 1099R. 

Submitted by Susan Comegys on Tue, 2019-11-05 20:35

What could have been done so that the IRA would remain non-taxable?  Simply to not touch it with the first custodian until the estate was ready to make a distribution to the beneficiaries?  This is confusing.  The second custodian told us the IRA should have been transferred to the new inherited IRA for the estate. 

Submitted by Alan - IRA critic on Tue, 2019-11-05 22:31

  • The inherited IRA should first have been retitled to the estate as beneficiary. At that point it could have been transferred in a direct non reportable transfer to a different IRA custodian or left in place until the executor of the estate assigned the inherited IRA out of the estate to the beneficiaries in the will. This process has been the same for years and approved by the IRS, but some custodians still resist it because it is easier for them to just distribute the entire account to the estate.
  • Once the inherited IRA is assigned to the beneficiaries of the will, they will each have their own individual inherited IRAs, but the RMD divisor will be the same for all. The 5 year rule applies if the IRA owner passed prior to the RBD, and if they passed later the inherited IRAs would have to be distributed over the remaining life expectancy of the decedent.
  • If the second custodian knew that they should only have funded this account with a direct transfer check, why did they accept a distribution check made out to the estate?  They should have declined it.  At that point, if the distribution check was issued in error (you have not indicated it was an error on their part) it could then have been returned to the first custodian and the new custodian could have sent them a transfer request to transfer the inherited IRA to them. 
  • The original error of not naming individual IRA beneficiaries was the most costly, then the actual lump sum distribution of the inherited IRA balance was the second error. Combined, they resulted in taxes being due in a single year. And the third error made by the new custodian in accepting a distribution check as a rollover created excess IRA contributions in that second IRA. 
  • Custodians are often less than helpful to beneficiaries in avoiding these costly errors. More training should obviously be done for involved staff. The underlying problem may be that these custodians do not really want to maintain inherited IRAs because they are wasting assets (no new contributions) and frequently involve litigation problems and overhead due to multiple beneficiaries.

 

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