Estate IRA
Unfortunately, Individual died with only an IRA with no designated Beneficiaries. Costly mistake that will now have the will probated and letters testamentary issued. My question is about what comes next and minimizing overall tax implications. Once the executor has authorization, can the original IRA be transferred to an Estate Inherited IRA and then have the funds transferred out of that to the beneficiaries’ inherited IRAs? I believe this would allow the beneficiaries the benefit of draining their accounts over 5 yrs and since no distributions are made directly to the estate, no 1041 return or K-1s would need to be filed.
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-06 20:21
Yes, you are correct. Despite the downsides, taxpayers continue to leave plans to their estate, although usually these plan balances and the estates tend to be smaller. While usually not possible for a qualified plan, an IRA forced distribution is unlikely, allowing the IRA to remain undistributed until an executor assignment to separate inherited IRAs can be completed (subject to occasional resistance by the IRA custodian). Estate beneficiaries can then complete any year of death RMD due from the decedent as well as manage their own beneficiary RMDs over the applicable IRA distribution period, which is not changed as a result of the assignment process. 5 years (maybe 6 tax years) only applies to individuals passing prior to RBD, while the remaining LE of the decedent will apply to deaths after RBD. In fact, IRA owners passing shortly after their RBD and leaving the account to their estate may end up producing a longer distribution period than the post Secure Act 10 year period for non EDB designated beneficiaries.
Unfortunately, the same IRA owners that leave accounts to their estate are the ones that do not bother to check if their IRA custodian will cooperate with executor assignment. Custodians generally do not find modest inherited IRA accounts as attractive, so it may not be easy to simply transfer the inherited IRA to a new custodian. If not possible, the estate may have to stay open, file 1041 and K 1 forms, and manage beneficiary financial needs and estate administration to dilute large lump taxable distributions to the estate.