Bypassing Estate & Informal Probate through Inherited IRA(s) + Small Estate Affidavit

Submitted by Mike Liebler on Fri, 2023-01-20 19:48

I am the personal representative for my Dad’s estate, Maricopa County Arizona. He had a living trust with a pour over will, naming specific beneficiaries; unfortunately, an IRA and brokerage account he had set up just before his unexpected death was not titled to the trust. The custodian (Merrill Lynch) has offered to “bypass the estate” under my direction to create inherited IRAs FTBO the beneficiaries. Given the IRA + brokerage account exceeds the $75k small estate threshold in Arizona, my attorney has filed for informal probate and directed me to complete the typical (informal) probate process. My question is, given that the IRA’s custodian has offered to bypass the estate directly to inherited IRAs for beneficiaries named in the trust, versus creating an IRA FTBO the estate, and the remaining value of the estate’s brokerage account is less than $75k, wouldn’t this be an opportunity to simplify this process, file a small estate affidavit with the probate court, and pursue a simplified probate under the terms of a “small estate?” My lawyer didn’t suggest this as an option, and the only glaring problem may be this process, and my formal appointment as personal rep, has already started (although very recently). Nevertheless, in theory, is this sound logic, or am I missing something. Thanks for your insights



Submitted by Alan - IRA critic on Fri, 2023-01-20 20:49

  • If you have an AZ estate attorney, you should run this by your attorney, but your plan appears to include both a misrepresentation of your personal rep appointment application and the gross value of the estate.  Are you also the successor trustee of the trust? 
  • While you are more concerned over the speed of transfer of these inherited IRAs out of the estate or trust, note that if a pour over will subject to probate transfers an inherited IRA into a trust, the IRS will not treat the trust as qualified for look through purposes with respect to the inherited IRA RMDs, although the new 10 year rule has recently truncated that benefit. Expedited inherited IRAs provided by ML for the trust beneficiaries does not change the fact that Dad’s estate actually inherited the IRA. As such, if he passed prior to RBD the 5 year rule applies, and if he passed after his RBD, the IRAs must be distributed over what would have been his remaining single life expectancy even if the IRAs are never actually titled to the estate or trust. 

Submitted by David Mertz on Fri, 2023-01-20 22:22

“Expedited inherited IRAs provided by ML for the trust beneficiaries does not change the fact that Dad’s estate actually inherited the IRA.”  This is key.  What ML proposes does not remove these assets from the value of the estate used to determine if the estate qualifies as a small estate.  It just saves the paperwork of the intermediate steps.  I would be a bit wary of this approach since it obscures the path that these assets actually take to reach the trust beneficiaries:  Assets to the estate, then to the trust and finally to beneficiaries.

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