Estate is beneficiary…3 people named in will
My client is about to inherit 1/3 of an IRA where the estate was the beneficiary. The funds are now in an Estate IRA BDA.
Can she use the 5 year rule for herself to rollover her 1/3?…and establish an IRA BDA to receive the 1/3 of the proceeds from the Estate IRA BDA?? I know she needs to still abide by the 5 year rule, but it would help to stretch out payments for a few years.
Her attorney says “no”. But I seem to remember something wherein this can be dons. Any help?
Permalink Submitted by mk foss on Tue, 2010-12-21 22:34
The usual scenario goes like this.
A beneficiary IRA is established for the estate – if the IRA owner had not reached the required beginning date, the 5 – year rule is used for RMDs from the IRA. If the IRA owner had passed the Required Beginning Date and was receiving distributions, the Estate’s RMD would be based on the decedent’s age.
In order to close the estate, the IRA can be assigned to the 3 beneficiaries. Each of them uses the remaining period established by the estate for RMDs.
The 5-year rule is not an election made by a beneficiary.
Permalink Submitted by [email protected] on Tue, 2010-12-21 22:40
Thank you so much for your kind reply. I do understand this and have done this a few years ago, for another client.
Actually, the IRA decedent was 65 at death.
The tax attorney, who is advising the probate attorney, has said that the beneficiaries cannot have IRA BDAs set up in their names, making all the IRA distributions fall under the higher compressed estate tax rates. I disagree with him, as you have stated. Can I refer him to something like a PLR, that you know of??
Permalink Submitted by Alan Spross on Tue, 2010-12-21 23:07
Not exactly an IRS cite, but recognized IRA authority Natalie Choate had had this article on her website for a few years now:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
She views the problem as being with the IRA Custodians, not the tax attorney. It would be ridiculous to require an estate to remain open and filing a 1041 for several years. In this case only 5 years plus, but for decedents passing after the RBD, you could be looking at almost 16 years!
Permalink Submitted by [email protected] on Tue, 2010-12-21 23:24
Not only ridiculous of this attorney, but painful, when all distributions would get taxed at 35%!
God Bless you for finding this. I think it should help this tax attorney. If it doesn’t, then he’s way too pompous, and I’ll have to call him on it.
THANK YOU SO MUCH!!!
Permalink Submitted by Alan Spross on Wed, 2010-12-22 00:01
While incorrect, the result of keeping the estate open does not mean higher tax rates unless the distributions are retained in the estate rather than being distributed.
In most cases, any IRA funds distributed to an estate would be passed through to the estate beneficairies on a K1 form, and then taxed at each beneficiary’s marginal tax rate which is the same as if they were assinged their own BDA. Only if the estate retains the distributions does the higher compressed rates kick in resulting in less money to eventually be distributed to the beneficiaries.
However, if the estate remains open, a 1041 needs to be filed each year and that form generates the K1 that goes to the beneficiaries if the beneficiaries receive annual distributions. The charge to prepare a 1041 is typically higher than a 1040. A larger problem with not distributing the IRA itself to each beneficiary is the loss of independent control of the accounts in favor of the authority of the executor. Such things as naming successor beneficairies, changing investments and changing the IRS custodian must all be run through the executor. So even if you do not have the tax rate problem, you have all these other problems to navigate if the IRA remains in the estate.