Estate beneficiary for IRA
I have a 71 year old who passed away leaving her Traditional IRA to her estate. RMD’s have already begun, although not completed for this year. Can her sole heir and executor, a daughter, have the IRA changed to “Inherited” and take out the distributions over her life expectancy? Or does the IRA need to be changed to the estate and distributions taken over the deceased remaining life expectancy (15.3 years), with distributions going into an estate account? Also, can additional distributions be taken out of the IRA each year over and above the RMD amount?
Permalink Submitted by Alan Spross on Sun, 2008-07-13 20:24
There have been PLRs allowing a spousal beneficiary to complete the rollover out of an estate in such circumstances, but not a non spousal beneficiary. Therefore, the decedent’s remaining non recalculated life expectancy will apply to RMDs paid out to the estate as beneficiary of the IRA. The following is a link that explains options for the IRA upon termination of the estate:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
There is no limit to distributions in excess of the RMD amount, but there is an excess accumulation penalty for falling below the RMD requirement.
Beneficiary should still name her own successor beneficiary to the IRA, and distribute the remainder of any RMDs not taken by her mother prior to her death.
Note: Decedent could be 71 and still pass prior to her RBD, and if that were the case, RMD options would be affected. Above response assumes death after the RBD.
Permalink Submitted by Diana Scheel on Sun, 2008-07-13 20:48
In opening a new account to hold the deceased’s IRA, I heard an advisor recommend that the account be titled in the estate’s name, c/o the daughter, calling it a decedent IRA since she’s the sole heir. When the future required distributions are made, will they be taxed to the estate or the daughter? Whose tax ID goes on the account, estate or daughter? Will it still follow the life expectancy rules of the deceased or now the daughter? If the answer to all the above is the estate, does that mean the estate needs to remain open (life expectancy is 15.3 years) and income tax filed for the estate each year?
Permalink Submitted by Alan Spross on Sun, 2008-07-13 21:33
Yes, the inherited IRA should be re titled constructively as follows:
“Estate of Sally Jones c/o (executor) as beneficiary of Sally Jones, deceased”
An estate EIN is needed for the tax ID. The estate would then pass through the income on a K1 to the daughter and it would be taxed at the daughter’s marginal rate. An estate can have a fiscal tax year vrs calendar, so this could affect the CY of taxation to the daughter. The tax records of the decedent should be checked to see if there is any unrecovered basis (Form 8606) in the IRA, as the estate would inherit that basis, making the distributions less than 100% taxable.
Based on the prior link, once the estate can be terminated and the IRA assigned to the daughter, the tax ID for the IRA would be changed to her SSN. However, that process would NOT affect the amount of the RMD, which would remain based on the decedent’s remaining life expectancy until the IRA was drained. In other words, the daughter will never be able to use her own life expectancy because she was never the designated beneficiary. RMDs in this instance are summarized in Pub 590, p 37, “Beneficiary Not an Individual”. This is true even though she is the beneficiary of the estate and the estate was the non individual beneficiary of the IRA.
It would appear to be appropriate to terminate the estate as early as possible, since filing a 1041 for the estate and a K1 would be a ridiculous process to live with for 15 years. Not unless there is another reason requiring the estate to be kept open. As the link explained, if the IRA custodian balks, the IRA should then be directly transferred to a different custodian to the IRA can be assigned to the daughter.
Permalink Submitted by Al Fry on Sun, 2008-07-13 22:43
My question is: Who is at fault with these mistaken benes? I get calls every week asking if surviving spouse can do a rollover; of if surviving child can do a stretch, when estate was the bene. Why are these things always left to staighten out after death? Where are the financial advisors prior to death? Is the custodian at fault? Their insurance agent? With all the info available out there, why are IRA owners QRP participants not taking action prior to death? Maybe the heirs are at fault for not helping their parents out with this.
Permalink Submitted by Bruce Steiner on Sun, 2008-07-13 22:58
The spouse can sometimes do a rollover even if the qualified plan or IRA benefits are payable to the estate. See my article on this in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf
It’s often hard to know when administering an estate, especially one that we did not plan, why the decedent did what he/she did.