Estate with only qualified accounts

Submitted by Stephen Csenge on Wed, 2015-07-22 15:17

Client passed away with a Condo, a car, $3,000 in checking, and $600,000 in an IRA. The only income was social security, a small pension and monthly distributions from the IRA (which exceeded the annual RMD).

The Estate passes to the daughter by will and she is the Estate Administrator. The IRA is split equally between the daughter and two sons.

The small checking account is not sufficient to cover the funeral costs nor ongoing mortgage, car payment and condo association fees. Is there any way the Estate Administrator can access IRA assets – as they are part of the estate – to settle estate costs prior to distributing the IRA to the beneficiaries?



Submitted by Alan - IRA critic on Wed, 2015-07-22 17:14

No. The IRA beneficiaries can take distributions which can include the year of death RMD or or their own subsequent RMDs and give or loan the money to the administrator to use for estate expenses. Such distributions will be taxable to the individual IRA beneficiaries.

Submitted by Ben Meyer on Fri, 2015-07-24 14:44

  • How will the loans be ultimately repaid?  At the time that the estate assets are distributed the cash in the checking account will probably be depleted.  That leaves mainly the value of the condo to repay the loans.  Assuming that the daughter is the lender, and not the sons, it looks like the the stepped-up basis of the condo will need to be reduced by the value of the loan plus interest when it is conveyed to the daughter.  This way, a portion of the condo value is given to the daughter as repayment of the loan.  But I’m not sure how this would be documented.  
  • An alternative is for the estate to sell the condo or car and pay back the loan from the proceeds.  This can also be done at the outset to avoid the need for loans.  The interest on any loan would be deductible by the estate and taxable to the daughter, depending on the terms of the loan.  The interest should be at least the rates shown as “Applicable Federal Rates”.     Is the foregoing the correct way of proceeding??

Submitted by Jose Morales on Fri, 2015-07-24 15:54

It’s also important to understand that if there were named beneficiaries (the three children) then the IRA is not part of the estate.  If there was no beneficiary and the plan document states that the estate is the default beneficiary when no beneficiary is named, then the IRA would be part of the estate.

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