No Retirement Beneficiaries
My daughter passed away and had no beneficiaries listed for her employer retirement plans or for her traditional or Roth IRA accounts. I am the beneficiary of her will. I am told that the employer plans are going to be paid out to her estate and 1099Rs issued in 2022 for 2021 with required 10% withholding. Is the estate responsible for paying the income tax on these distributions or am I required to report these distributions on my personal tax return or both?
Permalink Submitted by Alan - IRA critic on Tue, 2021-05-04 21:31
Sorry to hear of your loss. The executor (you?) will have to file a 1041 for the estate income including the withholding. It cannot be transferred to your tax account as beneficiary.
Nothing can be done about the employer plan lump sum distributions to the estate, but as her beneficiary this income can be passed through to you on Form K 1 and the eventual taxes will be due at your personal marginal rate.
However, for the IRAs the executor can assign the inherited IRAs out of the estate to you as the estate beneficiary. While these inherited IRAs must be completely distributed under the 5 year rule, you can control the amount and timing of these distributions. For example, the Roth earnings become tax free after 5 years have passed from the year of her first Roth IRA contribution, so if you can determine if that was prior to 2017, the Roth is fully qualified and tax free. The inherited TIRA distributions will be taxable, and therefore you might benefit by distributing the inherited TIRA about equally over the 5 or 6 tax years to avoid a spike in taxable income.
When the estate closes, the withholding taken from the employer plan distributions can be refunded to the estate and passed through to you. That will offset some of the taxes you pay personally.
If you are not familiar with Form 1041, you may wish to retain a professional tax preparer to file that return and/or select a calendar tax year or fiscal year for the estate.
The Secure Act did not affect the RMD provisions for estates.
Once you get the inherited IRAs set up and titled with you as beneficiary of the estate, be sure to name your own successor beneficiaries.
This situation illustrates that an estate inheriting a plan is not tax wise, but the situation is much worse for employer plans than for IRAs because a lump sum distribution to the estate cannot be avoided from the employer plans, but can be avoided on inherited IRAs.