Estate as Bene of IRA and Estate names Charity
A friend of mine is executor of an estate. The decedent left an IRA to his estate – a large one. The Will names numerous indiviudals and charities as beneficiaries. We are worred about the very large tax that comes from naming the estate as beneficiary of the IRA. Is the tax offset by an income tax deduction when the charities get paid? Should the executor make sure he receives the money in the same year it pays out to the charity? Is it worthwhile to negotiate anything with the IRS?
Any suggestions on how to reduce the tax? If it matters, I’m pretty sure he died before 70.5.
Thanks.
Andy
Permalink Submitted by Alan Spross on Tue, 2012-05-22 22:08
If the executor requests the charitable share of the IRA to be distributed right away and then pays off the charities, that portion should be offset by deductions on the 1041 that should not result in any taxable income passed through to the individuals, at least with respect to the IRA.
If decedent passed prior to his RBD, the 5 year rule applies to the rest of the IRA. But the executor can have the remainder to the IRA balance assigned to the individuals and each can have a separate inherited IRA. They can then make individual decisions regarding how fast they request distributions, but under the 5 year rule all these inherited IRAs must be fully distributed no later than 12/31 of the 5th year following the year decedent passed. With assignment, the estate does not have to remain open until the IRA is fully distributed.
If it happens that the IRA has basis from non deductible contributions, then Form 8606 would reduce the taxable amount on each year’s distributions. Unfortuneately, some of that basis would be lost to the charities so the benefit would be lost on that portion.
There should be no need to negotiate anything with the IRS under the above procedures. The above comments only reflect the IRA handling, but obviously the other estate assets will affect the 1041 and what is passed through to the individual beneficiaries. If decedent passed after his RBD, the 5 year rule does not apply and the decedent’s life expectancy applies instead.
Permalink Submitted by Andy Poll on Wed, 2012-05-23 18:41
Alan, thank you for your reply.
Is there any authority that I can cite to the bank? They say everything has to be distributed to the estate. Thanks again.
Permalink Submitted by Alan Spross on Wed, 2012-05-23 22:14
Read this article with attached links including sample letter. If the bank will not cooperate, it should be fairly easy to find an IRA custodian that will. Since inherited IRAs are wasting assets banks often push for a lump sum distribution to the estate to avoid additional administrative work.
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Andy Poll on Thu, 2012-05-24 17:56
Thank you again, Alan. Most helpful.