Estate as beneficiary.
Friend died and left $1million IRA to his estate. His will stated that 9 nieces/nephews and 2 charities will split. He passed in 2010 so no estate taxes but what is the most tax efficient way to pass to heirs? Can the estate open a beneficial ira and transfer funds to the heirs without income tax liability? Can the estate open a beneficial ira and transfer to beneficial ira’s for the heirs? Getting conflicting advice please advise. Thanks.
Permalink Submitted by Alan Spross on Wed, 2011-09-07 21:03
The estate should set up a beneficiary IRA, and any RMDs required must be paid to the estate and passed through to beneficiaries by the estate. When the estate terminates, the IRA can be assigned to the individual beneficiaries who can have separate accounts, but all of them will have the same RMD divisor.
IRAs should not be left to estates, because this destroys the ability to stretch the IRA over a long period. It is particularly damaging if the IRA owner passes PRIOR TO his required beginning date, because that will trigger the 5 year rule. Under the 5 year rule, there is no particular RMD per year, but the entire IRA must be distributed no later than 12/31 of the 5th year after the year owner passed. If owner passed on or after his RBD, then the IRA can be distributed over the remaining non recalculated life expectancy of the decedent. That means 13 years if the decedent was 75 and 7.6 years if decedent was 85. Therefore, the ages of the estate beneficiaries do not matter with respect to the IRA RMD since there were no “designated” beneficiaries.
Permalink Submitted by Joe Clark on Wed, 2011-09-07 22:10
thank you for your response. It was prior to RMD. You stated that when the estate terminates it can assign to the individual beneficiaries, how is that accomplished?
Permalink Submitted by Alan Spross on Wed, 2011-09-07 22:39
Here is an article from a noted authority:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
With the 5 year rule applicable here, the executor should resist the tendency of the IRA custodian to distribute the entire IRA to the estate. If the estate can terminate in short order, the separate accounts can be set up that will enable each beneficiary to determine how much to distribute in each year. Usually, the 5 year rule will allow for 6 different calendar years to be used to fully distribute the inherited IRA. It may also be possible to assign the IRA to beneficiaries before the estate is closed.
Permalink Submitted by Joe Clark on Wed, 2011-09-07 23:17
There in lies the issue. How to get from an inherited bene ira for the estate to the “successor” ira’s/accounts for the heirs. The logistics of how to make this happen?
Permalink Submitted by Alan Spross on Wed, 2011-09-07 23:35
See the second paragraph in the link provided in prior post. If there is resistance from the IRA custodian, a direct transfer of the entire estate IRA to another custodian may be required. The most important thing to remember is that ANY distribution from the IRA is irrevocably taxable. There is no way to do a 60 day rollover of the account.
Permalink Submitted by Joe Clark on Thu, 2011-09-08 00:04
Thank you. I believe a new custodian is the remedy.
Permalink Submitted by J Futch on Thu, 2011-09-08 16:07
Why not just have the estate attorney include in the Petition for Discharge a request to assign the IRA to the estate beneficiary as part of the normal process of closing the estate? Then, the Order of Final Discharge would include that authorization and the custodian *should* rely on that Order to process the transfers. You should speak with the estate attorney for further details and also include in the discussion a knowledgeable person from the custodian as sometimes they want the Order to be very specific.
Seems this might be easier than moving the account.
J
Permalink Submitted by Bruce Steiner on Thu, 2011-09-08 19:28
If it’s only 5 years, it’s probably not too inconvenient to keep the estate open. By using a fiscal year, the distributions can be spread over 7 taxable years.
If it’s too inconvenient to keep the estate open, or if the IRA owner had reached his/her required beginning date (generally April 1 in the year after reaching age 70 1/2) so that the IRA can be paid over the IRA owner’s life expectancy as if he/she had not died, the executor should be able to transfer the IRA in kind. In other words, each beneficiary would have an IRA with his/her share of the original IRA. That won’t extend the payout, but will avoid having to keep the estate open.
There shouldn’t be any need to go to court for this. If the IRA custodian doesn’t understand this, the executors can transfer the IRA to a different custodian.