Inherited IRA closing and distribution issue
The people handling my father’s estate and Inherited IRA have screwed up. I am wondering if there is a way to fix or amend this problem.
They liquidated the remaining investments of the IRA in August of 2021.
They transferred the funds from the IRA to the estate account in December with the goal to make disbursements to family members in January 2022. This disbursement was to be the final one and was to count for 2022. They gave us a disbursement last January,and one in 2019. They decided on three disbursements which screwed us all in taxes, but anyway…
We are now being told by the tax attorney who handled this that because they moved the funds from the IRA to the Estate account. essentially closing the IRA (in Dec of 2021) then the disbursement we received in January 2022 now have to be lumped in disbursement we received in January of 2021 because the IRA funds were moved to the estate account in 2021.
So instead of paying taxes on $150K disbursement for 2021, they are now saying we have to add the Jan 2022 disbursement of $167K to the Jan 2021 disbursement and Pay taxes on the entire amount with our 2021 returns.
So questions:
1. Is this correct?
2. Is there a way to reverse this or amend the closing date of the IRA?
3. Is this a major screw up that could point to malfeasance or a law suit.
The disbursements were to be in three years. now we have two of them in one years which is putting a lot of us at a higher tax bracket.
I would appreciate anyone offering their thoughts or advice on this.
Bill Ferrell
818-590-1590
Permalink Submitted by Alan - IRA critic on Mon, 2022-03-14 18:40
Unfortunately, this is correct. The IRA custodian has likely issued a 1099R to the estate for the lump sum distribution plus any earlier distributions to the estate in 2021. The executor of the estate should be paying estate expenses from the estate assets and passing the remainder to the estate beneficaries on a K 1 form for 2021 as was indicated. Each beneficiary would owe taxes at their own rate, which is still lower than the rates for the estate. There is no way to reverse this once tne IRA has been distributed but this could possibly justify litigation against the executor, once the cost of this error can be determined. If the estate has large enough expenses owed paid from IRA funds, the costs may be less. You would need to see the estate 1041 and it may be reporting on a fiscal year instead of a calendar year. However, if you advise your father’s DOB and DOD, we can determine what RMD rules might have applied to his estate or to the beneficiaries of his estate. In most cases, failing to name an individual or charity as IRA beneficiary is a costly error.
Permalink Submitted by Bill Ferrell on Mon, 2022-03-14 20:51
Thanks Alan. My father died in 2019 ay the age of 86. We all were awrae of the fact that this should have been handled differently. We tried to get my brother to do the distribution either over a longer period of time. We also tried to get him to split my Dad’s inherited IRA into seven…one for each sibling. Unfortunately he got bad advice from Morgan Stanley and the law firm he was using. Now we are all paying for this. Litigation is definitely on the table!
Permalink Submitted by Bruce Steiner on Thu, 2022-03-24 18:52
As Alan pointed out, the estate could pick a fiscal year, and could deduct the administration expenses against the income.
In addition to the possibility that the executors might have a claim against someone, the beneficiaries might also have a claim against the executors. However, they would have to consider whether the amount involved is sufficient for this to be practical.