Inherited IRA flowing through trust – When is distribution received accounted for

Submitted by Tim Johnson on Tue, 2019-11-12 22:58

Just starting the inheritance process with two brothers. One of the others is Executor of the Trust and hastily applied for a distribution from the descendants IRA. The Beneficiaries on the IRA were changed from the individuals to the the trust as the primary beneficiary about a month before the death, based on bad advice from the lawyer. Then the Executor requested a LUMP SUM PAYMENT to the trust, believing the funds could be split by the trust and rolled over to individual beneficiary IRAS for the three individual brothers. That is NO GO. Inherited/beneficiary IRAs can only be transferred from custodian to custodian. There is no 60 day rollover/rollback allowed once it is in the inherited/beneficiary situation. Now we are trying to minimize the tax impact for 2019.
The death was on 8/30/19 so the trust became non-revocable on that day. For 1041 purposes the plan is use a fiscal year filing, and have the trust distributed by 8/30/20, with net taxable income to the trust at near $0.00.

The check from the IRA was dated Nov 1, 2019, but has not been deposited or cashed yet.
The trust document requires specifically for IRA received funds that they be distributed Quarterly.
So if no other consideration is made, that would require the IRA distribution to be sent by November 30, 2019, making the distribution to the heirs taxable in 2019.
Can the check be delayed in being deposited until December 1, 2019? This would allow the distribution to the heirs to occur in the second quarter, in this case Calendar year 2020, thus making the distribution taxable to the heirs in 2020 versus 2019.
Or does accounting practices require the trust to consider the funds received on November 1, 2019, and therefore attributable by Nov 30 2019?
Unfortunately the lawyers stuck in an unneeded and in this case restrictive and potentially costly clause requiring the IRA proceeds to be distributed quarterly. We are trying to defer additional personal income in 2019, so as not move up in the tax brackets for 2019, as income planning had been completed and executed prior to the death grantor.



Submitted by David Mertz on Wed, 2019-11-13 01:55

Income from the trust is reported on the beneficiaries’ tax returns for the year that contains the last day of the trust’s income tax year in which the trust received the income, so as long as the trust’s income tax year does not end on November 30 or December 31, this income received by the trust on November 1, 2019 will be reportable on the beneficiaries’ 2020 tax returns.  See “Beneficiary’s Tax Year” in the instructions for Form 1041:  https://www.irs.gov/pub/irs-pdf/i1041.pdf

Submitted by Tim Johnson on Wed, 2019-11-13 20:27

Thanks for the quick response.  I reviewed the reference document I1041 and Pub 599, and want to interprete as you imply.  There are two successive paragraphs that at first read are contradictory, unless you can assume the second one overrides the first.  Given the unclear and confusing use of like terms by the IRS and not always using all the adjectives they could makes me question this.  I have copied the sections below from Pub 559.  I was able to satisfy my self that the second paragraph overrides the first by reading the tax code itself also included.  Since it is a standalone section in the tax code and just refers to “income”  I believe it overrules  the discussion of Current income and tax year.  The Code is much clearer than the publications.

From Pub 559When to report estate income. If income from the estate is credited or must be distributed to a beneficiary for a tax year, he or she reports that income (even if not distributed) on his or her return for that year. The personal representative can elect to treat distributions paid or credited within 65 days after the close of the estate’s tax year as having been paid or credited on the last day of that tax year. If this election is made, the beneficiary must report that distribution on his or her return for that year.Other income from the estate is reported on his or her return for the year in which it was received. If the beneficiary’s tax year is different from the estate’s tax year, see Different tax years, next.

  Different tax years. Each beneficiary must include his or her share of the estate income in his or her return for the tax year in which the last day of the estate’s tax year falls. If the tax year of the estate is a fiscal year ending on June 30, 2018, and the beneficiary’s tax year is the calendar year, the beneficiary will include in gross income for the tax year ending December 31, 2018, his or her share of the estate’s distributable net income distributed or required to be distributed during the fiscal year ending the previous June 30.

§1.662(c)-1   Different taxable years. If a beneficiary has a different taxable year (as defined in section 441 or 442) from the taxable year of an estate or trust, the amount he is required to include in gross income in accordance with section 662 (a) and (b) is based upon the distributable net income of the estate or trust and the amounts properly paid, credited, or required to be distributed to the beneficiary for any taxable year or years of the estate or trust ending with or within his taxable year. This rule applies as to so-called short taxable years as well as taxable years of normal duration. Income of an estate or trust for its taxable year or years is determined in accordance with its method of accounting and without regard to that of the beneficiary. 

Submitted by Bruce Steiner on Thu, 2019-11-14 15:30

  • The beneficiaries may wish to consult with counsel to see whether a stretch would have been available, and if so, whether they may have a claim against anyone for the loss of the stretch.
  • Bruce Steiner

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