No named beneficiary. IRA distributions.
IRA owner died in 2007 after RMD started. No beneficiary designated. IRA currently owned by estate. Two heirs to the estate . One will disclaim the IRA. What options are available to the heir taking the IRA? And, is a lump sum distribution allowed this year or at all? The heir has little or no other income this year (2008). Much obliged. Thank you.
Permalink Submitted by Jose Morales on Tue, 2008-11-25 18:22
If the estate is the IRA Beneficiary then any distributions must be to the estate, not to the heirs of the estate. This is why it is extremely important to clearly name a beneficiary for your IRAs. Not naming a beneficiary and having your estate be the beneficiary by default is the worst possible way to leave your money to your heirs.
The estate is considered a “non-individual” when determining the beneficiary options, therefore distributions must be taken based on the IRA owner’s single life expectancy using the reduction method. The executor of the estate can close out the IRA if they wish at any time.
Permalink Submitted by Stan Churchwell on Tue, 2008-11-25 19:48
Thank you, urusei2. However, I am confused. You write that distributions must be taken using the reduction method, but the executor can close out the estate at any time? Seems contradictory. If the executor can and does close the IRA and the money goes to the heir not disclaiming the funds, what is the tax treatment and penalties (if any) for the heir receiving the funds?
Permalink Submitted by Alan Spross on Tue, 2008-11-25 20:10
The RMD method that applies only indicates the minimum rate at which distributions are required. The beneficiary can accelerate this to any degree they wish.
The executor can order the IRA fully distributed to the estate or generally can terminate the estate and have the IRA assigned directly to the remaining beneficiary. Either way the IRA can be closed out with a total distribution.
The proceeds are fully taxable if there was no basis in the IRA. If distributed to the estate the executor will usually pass the distribution through the estate to the beneficiary and the beneficiary will get a K1 and report the income on their own return. If distributed directly to the beneficiary, then the 1099R will be issued to the beneficiary and again the distribution will be reported by the beneficiary.
There is no penalty involved unless the RMD is not taken to the extent required. Again, no penalty for exceeding the RMD requirement or for a total distribution.