Estate IRA Taxes and Penalties

Submitted by Eleanor Oliver on Tue, 2014-11-18 16:07

I’m writing on behalf of my 87 year old father who is the executor for the estate of my uncle. My uncle died in 1988 at the age of 57 and designated my two cousins as the beneficiaries of his estate. Unbeknownst to my father, there was a Fidelity IRA as part of the estate that my cousins never acted on, so there were no distributions made. In addition, there were no beneficiaries designated on the IRA, so technically it’s still a part of the estate. At the advice of Fidelity, an Estate IRA was set up. On the advice of an estate attorney, my father is setting up a checking account in the name of the estate. The attorney advised that we allow for maximum taxes and IRS penalties before disbursing the IRA to my cousins. We are trying to determine what the taxes are on the IRA as well as the IRS penalties as there have been no distributions made. Can you help? Is there any forgiveness on the penalties? I understand there is a Form 5329 that might help. In addition there is a judgement against my father for another part of the estate, but we don’t know the amount of the judgement yet. Any suggestions? Thanks for your help.



Submitted by Alan - IRA critic on Tue, 2014-11-18 16:33

I would recommend distributing the IRA to the estate, and having the estate file the 5329 requesting waiver of the penalty for reasonable cause per the last page of the 5329 Inst. The accompanying explanation should state that the IRA has been completely distributed and the IRA was not distributed by 1993 under the 5 year rule. The ordinary income taxes are due for the year distributed, but the excess accumulation penalty of 50% of the 1993 year end balance was due back then, so the IRS could bill late interest for 21 years. The estate can also file a form requesting prompt resolution of the estate return by the IRS so the estate does not have to remain open indefinitely. The IRS approves many of these waivers by simply not replying, but requesting prompt handling will prevent a long waiting period, so your father can close the estate. This could still take more than a year.  Once the IRS has made the decision on the penalty waiver, remaining IRA proceeds can be distributed out to the will beneficiaries on a K1, and cousins will pay the taxes. 

Submitted by Eleanor Oliver on Sat, 2015-05-16 17:16

We are in the process of moving the Fidelity Estate IRA to a Fidelity non-IRA brokerage account in the name of the Estate. We have a few questions.1. Regarding the 5329 form, what amount should we put on Line 50? Is the amount based on the value of the IRA in 2015 or 1993 when it should have been distributed?2. What form do we use to request prompt resolution of the estate?3. If we don’t hear back from the IRS in 2015, does the estate pay the tax on the IRS because it was not distributed to the beneficiaries in 2015?Thanks for your help.

Submitted by Alan - IRA critic on Sun, 2015-05-17 00:43

  1. Use the 1993 5329  http://www.irs.gov/pub/irs-prior/f5329–1993.pdf. Line 14 should show the 12/31/1993 IRA balance.
  2. Prompt resolution form is 4810.
  3. Better check with the estate attorney if he files 1041 forms on this question. The problem is what happens if the proceeds are passed to the estate beneficiaries in 2015 and the IRS declines to grant the excise tax waiver.

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