Estate named Beneficiary

Submitted by Jo Anne Schneider on Wed, 2020-06-17 20:12

My client passed away in 2/2020. She named the estate the beneficiary of her IRA accounts (Roth and Traditional). The attorney is telling me that the executor cannot transfer the IRA’s from the estate account to the willed beneficiaries inherited IRA accounts. If this is possible, how do you do it. The Estate attorney wants them liquidated in 2020 and income distributed on the 1041. The tax would be double then it would be if we used the 10/11 year stretch to distribute the money to the benefciaries.



Submitted by Alan - IRA critic on Wed, 2020-06-17 21:16

  • The estate attorney is absolutely incorrect. Like any other assets in an estate, an inherited IRA can be assigned by the executor to the will or intestate beneficiaries of the estate. That said, there are a few small IRA custodians that resist because they are not fond of inherited IRA accounts.
  • In the case of the Roth IRA, the 5 year rule will apply, so the Roth could be generating tax free gains for the rest of this year until 12/31/2025 which is the deadline for the inherited Roth to be drained.
  • For the TIRA account, unless it is small a lump sum distribution will generate a large tax bill for the estate or beneficiaries of the estate. An inherited TIRA is also subject to the 5 year rule if decedent passed prior to their RBD, or annual RMDs over the decedent’s remaining life expectancy if they passed on or after their RBD. The Secure Act did not affect these provisions.
  • The following point contains several posts on this subject and includes a sample letter for the executor to send to the IRA custodian requesting assignment of the inherited IRAs.
  • https://irahelp.com/forum-post/61300-rmd-requirements-inherited-ira-fbo-estate-2020
  • If the IRA Custodian resists, they should be pressured. Large custodians such as Schwab, Vanguard, Fidelity or other brokerage firms have not resisted assignment for many years. If the current custodian resists, the accounts can be transferred directly to a custodian that will cooperate.
  • Again, a lump sum can result in a large tax bill that can be avoided.  As such the executor can sustain legal damages from the beneficiaries should the assignment option be overlooked.
  • Finally, it is unexplainable that people continue to fail to name beneficiaries directly on their retirement accounts, since that generates an undesirable outcome.

Submitted by David Prey on Tue, 2020-06-30 18:53

Both JP Morgan and Charles Schwab are saying my wife (executor) can’t transfer the Estate IRA to inherited IRAs for the 2 beneficiaries (both are non-designated beneficiaries).  The death occured 3/17/20.  Both are saying the Estate IRA can only make distributions to the beneficiaries.  If this is not true is there anywhere in IRS documents/internet where this is stated?  In case it makes any difference the Estate IRA was also an inherited IRA but the deceased could not add any beneficiaries due to being mentally incapicated at the time of receiving the IRA.

Submitted by Alan - IRA critic on Tue, 2020-06-30 20:10

Are you the original poster?   And are you positive this is an IRA and NOT an employer plan such as a 401k?

Submitted by David Prey on Wed, 2020-07-01 12:17

I’m not the original poster.  Yes It is an IRA.

Submitted by Bruce Steiner on Sat, 2020-06-20 16:58

  • In addition to yelling and screaming at the lawyer who planned the estate, the executor should consult with different counsel for the reasons Alan mentioned.
  • If the 5-year rule would apply, it might be simpler to keep the estate open for the 5 years.  By using a fiscal year, it may be possible to spread the distributions over 7 taxable years.  Administration expenses could be used to offset some of the income.

Submitted by Ben Meyer on Mon, 2020-06-22 04:23

I’m wondering how a fiscal year could be arranged so the distributions are taxable to the beneficiary over 7 tax years.  I can see 6, but I can’t see how 7 would be done.

Submitted by David Mertz on Mon, 2020-06-22 14:13

  • Spreading over 7 years can be done by taking two distributions in the year of death, one before the end date of the estate’s fiscal income tax year and one after, then taking distributions in each of the next 5 calendar years after estate’s fiscal year end, the final distribution being in the 5th year after death.
  • For example, for a decedent dying in February 2020, the estate’s establishes a fiscal year ending, say, August 31, and the estate takes a distribution in July 2020, then in October of 2020, 2021, 2022, 2023, 2024 and 2025.  The distributions will be taxable on the beneficiary’s 2020, 2021, 2022, 2023, 2024, 2025 and 2026 tax returns.
  • (Wouldn’t be possible if the decedent died in December.)

Submitted by Ben Meyer on Wed, 2020-06-24 02:07

Possibly something else can be done using this same approach. If the IRA beneficiary is a qualified trust with conduit language and the beneficiary is subject to the 10-year rule, can the trust make a section 645 election, establish an appropriate fiscal year for the trust and estate, and distribute the IRA over a 12 year period? That would be a slight improvement. 

Submitted by Bruce Steiner on Sun, 2020-06-28 22:30

  • A Section 645 election may only be made for a revocable trust.
  • A Section 645 election is only good for a limited period of time.
  • Conduit trusts don’t often make sense.
  • Bruce Steiner

Add new comment

Log in or register to post comments