No beneficiary named, IRA owner deceased, who pays the tax?

Submitted by Jack Thomas on Fri, 2014-04-25 22:49

IRA owner dies in their 50s, no named beneficiary. Is the following correct?

1. IRA must be paid out to the estate within 5 years?
2. The estate pays the taxes?

And would there be a way for the taxes to be passed onto particular beneficiaries of the estate? Or would all the distribution be taxable to the estate first before the funds are ultimately dispersed to the beneficiaries? Are there any choices or flexibility here?

Thanks!



Submitted by mk foss on Sat, 2014-04-26 00:06

There are a couple of possibilities here:

  1. When no beneficiary is named, you need to check the IRA custodian’s agreement. In most case, the estate would be the beneficiary but it could be a surviving spouse, or surviving children when there is no surviving spouse.
  2. If the Estate is definitely the beneficiary, the five year rule applies.  That means the IRA balance must be zero by 12/31 of the year that has the five year anniversary of the death.
  3. If the estate receives benefits and does not distribute them to beneficiaries within the same taxable year, the estate will pay tax on the distribution (after deducting any expenses that year).
  4. The executor can ask that the IRA be assigned to the estate beneficiaries. In such a case, the five year rule still applies but the beneficiaries will bear the tax and control the timing of distributions within the five year time frame. In order to do this,the executor will likely need a probate court order.
  5. Between taking distributions, then distributing them the same year and assigning the undistributed portion – some flexible choices are available. Not as flexible as if a beneficiary was named but not fatal.

 

Submitted by Jack Thomas on Sat, 2014-04-26 14:03

Thank you so much, that’s very helpful.  Just out of curiosity, where do you even find information like that (other than posting a question here)?  I searched all through IRS docs etc. and couldn’t find any info.  Where does a person look this kind of stuff up? Thanks again.

Submitted by Bruce Steiner on Sun, 2014-04-27 03:23

Why would the executor need or want court approval to distribute the IRA (or any other assets)?

Submitted by Jack Thomas on Mon, 2014-04-28 14:16

In this scenario, it would be a dispute over whether or not certain beneficiaries of the estate have to pay the taxes or if the taxes are paid by the estate first and then these certain beneficiaries get their share.  Beneficiaries would argue they are entitled to a dollar amount from the estate.  Others would argue that the dollar amount certain beneficiaries feel they are entitled to are taxed at the estate level and then passed along to certain beneficiaries.  IRA happens to be largest asset.  Obviously this example is beyond the discussion of thie platform, but just wondering if there is even any flexibility as to who pays taxes when there is no named beneficiary.  

Submitted by Alan - IRA critic on Sat, 2014-04-26 15:40

Certain books or articles written by tax or estate attorneys may tie several of these issues together in a single source. Looking at the 5 points made in the prior post, a source for each might be:

  1. Such an article or book.
  2. Pub 590, p 38
  3. Form 1041 Inst or tax article on estates
  4. Article or book such as http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
  5. Same

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