No named beneficiary
Gentleman died in 2010 before RBD with no beneficiaries named on his IRA. He was not married. I’m assuming the estate inherits the IRA. There are multiple individuals of various ages (some are minors) as beneficiaries of his estate. Can the estate separate the IRA to multiple inherited IRA’s before Sept 30th of next year? And if so, which distribution schedule would they all use?
Permalink Submitted by Jose Morales on Mon, 2010-12-20 21:06
Here is an article written by Ed Slott himself: http://money.cnn.com/2000/06/28/strategies/q_retire_slott/
Permalink Submitted by Alan Spross on Mon, 2010-12-20 21:31
95% plus chance your assumption is correct, but the IRA beneficiary provisions should be reviewed to confirm that the estate is the default beneficiary.
If so, the 5 year rule applies. While the IRA can be assigned to the beneficiaries of the estate and separate accounts created, that will not change the RMD requirements from the 5 year rule. But at least some beneficiaries may choose different distribution patterns from the others over the 5 year period. They also need to name their own successor beneficiaries.
Due to the 5 year rule, there is no need to rush out distributions through the estate and then distribute to beneficiaries on a K1. It would be easier to complete the assignment to beneficiaries first and then they can take distributions and change investments as they please.
Permalink Submitted by Jose Morales on Mon, 2010-12-20 21:44
a few important things to note if the estate is the default beneficiary, the funds in the IRA will be subject to the normal probate process. You aren’t going to be able to simply show the financial institution the will and have them either create seperate accounts or distribute the funds to the heirs without having gone through the probate process (or small estate claims process).
If seperate accounts are opened please be sure that the heirs understand that just because seperate beneficiary IRAs can be established for them, does not mean that they can use their own individual life expectancies for calculating an RMD. We frequently run into this problem and it is a huge headache, as the heirs have never been competently educated before showing up at our doorstep to open their “beneficiary IRAs.” They must always understand that the estate was the beneficiary of the IRA, and they are the beneficiaries/heirs of the estate. Not communicating this clearly if they bring the funds to a new financial institution can result in some very unpleasant tax consequences.
Permalink Submitted by Bruce Steiner on Mon, 2010-12-20 22:27
The 5 years can be 7 taxable years, since the estate can use a fiscal year, and the 5 years extends to the end of the 5th calendar year following death
Since there is generally no estate tax in 2010, the estate will likely claim the administration expenses as income tax deductions. The estate can plan the timing of both its receipts from the IRA and its distributions to beneficiaries to minimize the combined income tax burden on both the estate and the beneficiaries.
It may also be worth checking the default provisions of the IRA agreement. Occasionally the default is something other than the estate.