Distribution and taxation of an IRA held by estate

Submitted by Connie Horstkotte on Sat, 2021-08-07 05:24

I have a client whose brother passed away in January 2020. The brother had an IRA where the beneficiary was his mother, who was no longer living at the time of his death, so it went through probate. The IRA was transferred to an Inherited IRA held by the estate, and probate subsequently concluded. Since the IRA is subject to the “5 year rule”, when the funds are distributed, are they distributed to the estate and taxed as income to the estate, or distributed to the living brother as the sole heir to the estate and taxed as ordinary income to him?

Secondly, must the estate be kept open for 5 years (and estate income tax filed), or can the Inherited IRA be converted to an Inherited IRA held by the living brother, and distributed from there (avoiding the need for estate income tax reporting for 5 years)?

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Permalink Submitted by Alan - IRA critic on Sat, 2021-08-07 16:49

The estate does not have to remain open. Distributions are taxable to the entity that receives the distribution. The executor can assign the IRA out of the estate to the brother and any later distributions would be taxed directly to the brother. Even if a distribution is made to the estate before assignment, the taxable income can be passed through to the brother on a K 1 filed in conjunction with the estate 1041. The brother would report the income and pay the tax. Some custodians resist assignment even though they know full well that the IRS has approved it many times. The executor would then have to transfer the inherited IRA to a more cooperative IRA custodian.