Estate listed as IRA Beneficiary
Have client who recently passed away before age of MRD requirement. Estate is listed as beneficiary. Her Will provides for distributions to 4 kids, not equal %’s . Current custodian is requiring that Estate IRA with Estate TIN be established from which distributions are required to pay directly to kids. Tax liability goes to estate, whereby taxes would be paid by estate, putting the tax liability in 35-37% range.
I am reading where other custodians allow distributions from Estate IRA’s to go to inherited beneficiary IRA accounts, which would allow each beneficiary to control their distributions and tax liability. Personal marginal rates are in 24% range. Executor of estate would direct the transfers to the respective beneficiary IRA’s
Has anyone else had experience with this.
Thanks
Permalink Submitted by Alan - IRA critic on Wed, 2022-03-02 23:46
Assignment of the IRA out of the estate by the executor has been approved by the IRS on a number of occasions. That said, some IRA custodians resist accepting assignment and instead prefer to make a lump sum distribution to the estate, or nearly as bad expect the estate to stay open for years to receive partial distributions. This is unnecessary and counterproductive for all parties except the custodian. Under assignment each estate beneficiary receives by direct transfer their own inherited IRA which they can manage as they wish and pay distribution taxes at their own marginal rates. However, assignment does not change the fact that the 5 year rule still applies to each inherited IRA account.
Permalink Submitted by David Mertz on Thu, 2022-03-03 00:40
Even if it ends up that the estate receives distributions from the inherited IRA, the estate could distribute this income to the beneficiaries of the estate and pass through the tax liability to the beneficiaries as well on Schedules K-1 (Form 1041). The estate then takes tax a deduction for Distributable Net Income so that the estate doesn’t pay the taxes on this income.
Permalink Submitted by Bruce Steiner on Sun, 2022-03-06 04:37
Having the estate collect the IRA avoids the need to deal with the custodian to distribute the inherited IRA, allows the use of a fiscal year, and allows the deduction for administration expenses to be used against the IRA distributions. SInce the IRA has to be distributed by the end of the fifth calendar year following death, the nuisance of keeping the estate open is a minor one.
Bruce Steiner
Permalink Submitted by willem ooms on Mon, 2022-03-14 19:34
Can 100% of the pay out of an IRa or Annuity under the California Princpal and Income Act be allocated to income? I am looking at same issue here in California. It seems that a large part would be principal in CA if 100% were to be paid out at once to the beneficairies and therefore would no be deductible as DNI?
Permalink Submitted by Bruce Steiner on Thu, 2022-03-24 18:56
It would be included in DNI regardless of whether it’s income or principal. Section 643.