Executor Options for IRA Inherited by Estate

Submitted by Annette Leazer on Tue, 2019-11-12 00:03

My sister passed away one month after she turned 70 1/2. She had taken one RMD from her IRA. Her estate was named as the beneficiary for her IRA. Her will designates her four siblings as beneficiaries to her estate and I am the executor. I don’t want her IRA to be fully distributed due to the tax consequence for her estate and the beneficiaries. I understand that I can have an Estate IRA created to keep this as a qualified IRA for a period of time. I have three questions:
1. Given she passed after her 70 1/2 birth date but not after her required distribution date (April 1 of following year), does this IRA need to be distributed within 5 years or can it be distributed based on the RMDs for her lifespan? I see conflicting advice.
2. I understand that I can move the assets from the Estate IRA into Inherited IRAs for beneficiaries. Does the IRS have any rules on how I transfer this into Inherited IRAs? For example: If all beneficiaries agreed, could I move this entire IRA into a single Inherited IRA for a single beneficiary?
3. Could the estate get a distribution on a portion of the IRA and transfer another portion into one or more Inherited IRAs?
Each beneficiary is in a different tax situation and we want to work together to maximize the benefit of my sisters estate for the entire family.



Submitted by Alan - IRA critic on Tue, 2019-11-12 00:51

  1. Sorry to hear of your loss. She did pass PRIOR TO her RBD, therefore the 5 year rule applies when her estate is the beneficiary.
  2. Yes, as executor you can transfer the inherited IRA out of the estate to inherited IRAs for each beneficiary. In order to transfer the entire balance to just one beneficiary, the others would have to file qualified disclaimers with you, and the will would then determine who inherits the disclaimed portions. Likewise, an IRA custodian is unlikely to accept by assignment an inherited IRA with multiple beneficiaries. The expected solution is to assign the inherited IRA into separate inherited IRA accounts for each beneficiary.
  3.  This is possible, but again this is rarely done. Normally, the executor would like to close the estate without accepting income to be reported on Form 1041 and passing that through on a K 1 to the respective beneficiaries.  But if the estate needs income to cover expenses, this is a possibility. If most of the beneficiaries want a lump sum distribution anyway and the IRA balance is modest, this option would address those needs. 
  4. As executor you have many options, but some of them will cause considerable extra work.
  5.  Note that assignment to individual beneficiaries does not affect the 5 year rule, but it would allow each beneficiary total freedom to take distributions as needed with the only requirment being totally draining their inherited IRAs by the end of the 5 th year following the year sister passed. If she passed this year year prompt assignment would actually allow the chance to spread the distributions over 6 calendar years. Of course, each beneficiary would then name their own successor beneficiary on their inherited IRA accounts.
  6. If you encounter custodian resistance, a blanket approach rather than a fragmented approach might defuse the resistance. Many custodians do not really want inherited IRAs because they are wasting assets with litigation risks attached.

Submitted by Bruce Steiner on Tue, 2019-11-12 03:39

  • #3 isn’t that unusual.  By electing a fiscal year it’s possible to spread the income over six or seven taxable years.  It’s not that long a time to keep the estate open.
  • #2 is interesting.  If the four siblings agree to a non pro rata distribution of the estate’s assets, perhaps the executor could distribute the inherited IRA to the one who’s in the lowest tax bracket, and more of the other assets to the other three.  The four of them would have to agree as to how to value it for this purpose.
  • Bruce Steiner

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