60 day rollover of deceased’s IRA

Submitted by Mary K. Dean on Wed, 2016-08-17 17:19

A trustee withdrew all the deceased’s IRA and placed it in the deceased’s trust. He now knows that this is a taxable transaction. It has been less than 60 days since the withdrawal. Can the trustee place the money back into the deceased’s IRA? Do the remaining IRA RMD then establish inherited IRAs for the beneficiaries for the remainder?

If not, can the trustee set up inherited IRAs for the beneficiaries and transfer all to the inherited IRAs except the IRA RMD?

Thanks as always …. Mary!



Submitted by Alan - IRA critic on Wed, 2016-08-17 17:35

If the trust beneficiaries are not surviving spouses, there is no solution for this costly error and no possibility of inherited IRAs. A distribution to a non spouse or non individual beneficiary cannot be rolled over. Trustee should distribute the IRA proceeds to the trust beneficiaries if the trust permits that because unless the IRA was extremely small the tax rates for the individuals will be less than the trust tax rates.

Submitted by Ben Meyer on Wed, 2016-08-17 23:11

A slight amount of relief can be obtained by having the trust make a section 645 election, which will allow the trust to be treated as an estate.  See form 8855.  This way the trust can use the fiscal year of the estate.  This will allow the IRA proceeds to be distributed to the beneficiaries over two calendar years, but still within the same fiscal year of the estate.  The result will be that there will be little or no fiduciary tax at the high tax rates charged on fiducuary returns.  The beneficiaries will receive their proceeds in two separate calendar years, which will somewhat relieve the surge of income resulting from receiving the IRA proceeds.  It’s sort of like a two-year stretch.

Submitted by David Mertz on Thu, 2016-08-18 00:09

Benn, I don’t see how that helps.  Even though the fiscal year of the estate does not coincide with the calendar year, all of the distributions to estate beneficiaries made in the same estate fiscal year would be taxable on the tax returns of the beneficiaries for the year that includes the end date of the estate’s fiscal year, reported to each beneficiary on a single Schedule K-1.  The only way I see to avoid having the entire distribution be taxable on the beneficiaries’ tax returns for a single calendar year would be to retain some of this DNI in the estate, but that then subjects it to estate income tax rates, which would generally be worse.

Submitted by Ben Meyer on Thu, 2016-08-18 02:41

Wouldn’t the distributions be taxable to the beneficiaries in the calendar year distributed and received?  For example, assume that the estate has a fiscal year starting from a date of death on July 1, 2016 and ending on June 30, 2017.  Then, if the estate makes a distribution on December 1, 2016, and then another distribution on February 1, 2017 of the balance of the DNI, would a normal cash basis taxpayer be able to report the two distributions in two different tax years?  The regulations at 1.691 strongly imply that IRD is reported when received by the recipient.  Schedule K-1 would then report the total for the tax year of the estate, which may well span two tax years of the beneficiary.  Schedule K-1 (1041) is filed by the estate or trust for the fiscal year in question.  It is not filed again by the recipient.

Submitted by David Mertz on Thu, 2016-08-18 03:45

  • “Wouldn’t the distributions be taxable to the beneficiaries in the calendar year distributed and received?”  The beneficiaries of the estate/trust? No.  In your example, the distributions to the beneficiaries made on December 1, 2016 and February 1, 2017 are reportable on the estate’s income tax return for the fiscal year ending June 30, 2017.  The estate provides a single Schedule K-1 to each beneficiary showing the total of the distributions made during the estate tax year (the December 1, 2016 and February 1, 2017 distributions), reportable on each beneficiary’s 2017 individual tax return.
  • Note that in this case it’s the estate/trust that is the IRA beneficiary (presumably that was handled correctly and the listed beneficiary was indeed the trust to which the payment was made).  It is the the estate/trust that received the IRD and reports it on the estate/trust income tax return for the period in which the IRD was received by the estate/trust.  Had the IRA not been distributed to the estate/trust but instead the IRA was distributed as inherited IRAs for the benefit of the estate/trust beneficiaries (distributing the right-to-receive the income from the IRAs rather than distributing income received from the IRA by the estate/trust), distributions from these inherited IRAs would be reportable on the beneficiaries’ tax returns for the years in which the distributions from the IRA are made.
  • See section 662(c) and CFR 1.662(c)-1.  Paraphrasing, they say that the beneficiary treats as income in his/her taxable year DNI from the estate’s taxable year ending with or within the beneficiary’s taxable year.

Submitted by Ben Meyer on Thu, 2016-08-18 22:47

In regard to the added comment above citing the tax regulation section 1.662(c)-1, there may be interaction with section 691 and TR 1.691(a)-2 which states that IRD is taxable when received.  Resolution may depend on the direction given by the specific language of the trust.   

Submitted by David Mertz on Fri, 2016-08-19 00:45

I believe that 1.691(a)-2 applies to the beneficiary of the IRA, which, in this case, is a trust (treated as estate) described in 1.691(a)-2(a)(1), not to the beneficiaries of the trust (who receive the IRD as DNI but have not acquired the right to receive the IRD; that right belongs to the trust).  This means that this IRD is required to be reported on the trust’s tax return for the taxable year in which the trust receives the IRD.  This income is reported on Form 1041 line 8, satisfying 1.691(a)-2.  A deduction for DNI is taken later on line 18.

Submitted by Bruce Steiner on Mon, 2016-08-22 17:36

  • The beneficiaries of the trust may want to consult with counsel as to whether they may have a claim against the trustees.
  • What is the “deceased’s trust”?  How can the IRA owner be a beneficiary of a trust after his/her death?  Was a trust for the IRA owner’s benefit the named beneficiary of the IRA?

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