Sibling passed away with an Inherited IRA. No beneficiary was listed. Custodian sent the funds to the estate account in December 2023. I am the sole beneficiary/heir. It appears as though the funds will not be distributed to me until early 2024. Who will be reporting the taxes as income? It is my understanding my tax rate will be lower than the estate’s. Is there anything that can be done at this point to reduce the tax amount? Thanks in advance!
When income is passed through to you on a Schedule K-1, the income is reported on your tax return that contains the end date of the estate’s income tax year. The estate can choose to use a calendar year or a fiscal year, established with the first Form 1041 filed by the estate. If the estate chooses to use a calendar year, the IRA distribution would be 2023 income while the 401(k) distribution would be 2024 income. If the estate chooses to use a fiscal year ending with some month other than December, both distributions would be 2024 income.
Thank you for your tremendous information and quick response- very helpful to my situation.
Can the single heir to the intestate estate have the custodian (bank) of the IRA transfer the estate IRA to the heir in an inherited account designated in the name of the deceased estate for the benefit of the heir’s name subject to the five year distribution rules? In this case an elderly father outlived his younger son whose current bank custodian seems to have no record of the father as the designated beneficiary from the original 401K that was rolled over. The account was rolled over a couple years ago from the company plan after the son left the employer and the father was designated in the plan before it was rolled over to the IRA.
The executor of the estate must make the request, not the estate beneficiary. Most custodians will cooperate with such a request, but some will not. In that case, the executor may have to transfer the inherited IRA to a more cooperative IRA custodian. Once completed, the 5 year rule will still apply to the estate beneficiary.
Is there an IRA rule that allows this transfer of the son’s IRA so that we have some grounds to persist in our request that the ira is transferred to a an inherited IRA for the benefit of the beneficiary? Also, if we are not able to transfer the nondesignated IRA to the father beneficiary and the account remains at the estate will we have to keep probate open or the estate open to take tax advantage of the five year distribution?
For the above described transfer from estate in the name of the deceased for the benefit of the beneficiary, I am on the one hand being told that the funds go to the estate account, while the bank rep calls the estate an inherited estate account which is causing confusion. Is that correct terminology to call an estate an inherited IRA account? However, the form that I am requested to fill out as representative wants only the EIN for the estate as beneficary to be transferred from the IRA account with a payment option of inherited IRA. There is no explanation available that explains these options and no IRA agreements or disclosures were provided upon request to the credit union. Can I assume that the inherited account is not the estate? I am confused because there is no place on the form to ask for the beneciaries name (except for the EIN) or social security number and this form states that processing is automated by Ascensus. (Ascensus handles the compliance for the credit union.) Wouldn’t the social security of the beneficiary and not the estate be needed for this type of transfer request so that the 1099 R will be sent to the beneficaries social security number and not the estate? Also since the form states that it is processed using automation and states that any notes will not be read, the process does not allow me to write letters of instruction as a personal representative. I am also asked as the personal representative to sign for the transaction and tax withholdings. I am uncomfortable with this given the bank’s miscommunication with personal representative as heir which I am not, and the circumstances and communications regarding the transfer.
For the above situation the creditor phase of probate is completed and debts are satified so it remains to show that the father is the sole heir which I have legal documents for.
The inherited account is an IRA and the estate is the beneficiary. What you are trying to avoid is a lump sum distribution to either you or the estate, because that will result in the entire balance being taxable in a single year. The form they have provided apparently has no clear option for you as the PR to request assignment of the inherited IRA out of the estate to the estate beneficiary. With the funds transferred to the inherited IRA, the beneficiary can avoid a lump sum distribution, but still must drain the inherited IRA in the same year that the estate would have had to.
Even if they eventually accept assignment, the inherited IRA with the estate as beneficiary will probably have to be set up first under the estate EIN. One option you may have is partially complete the form and where a selection conflicts with your assignment request, refer to the written assignment request. In that same request be clear that you as the PR are not authorizing any distribution from the IRA at this time.
If they refuse to accept an assignment request, your other option is to have the inherited IRA for the estate set up and then find a more cooperative custodian that accepts assignments from PRs and have them request a transfer from the current custodian to an inherited IRA at the new custodian. Then pursue the assignment request through the new IRA custodian.
You indicated that there was a larger 401k inherited by the estate. For the 401k, there is probably no way to avoid a total distribution to the estate, meaning that the estate will already pass through that distribution to you as the beneficiary, but you have a chance to avoid this from happening with the IRA.
You did not indicate whether the decedent passed prior to their RBD, or after. If prior, then the 5 year rule applies, and if after the remaining LE of the decedent. Those requirements remain the same even if the inherited IRA can be assigned out of the estate.
Good afternoon. My father died before updating his IRA beneficiary following the prior death of my mother. The estate therefore is the beneficiary of the IRA. My two siblings and I are my father’s heirs, we inherit in equal parts. Here is my question. Once my father’s IRA is converted to an “Estate of Deceased” inherited IRA, can we then create three separate inherited IRAs, “Estate of Deceased for benefit of X”, each of which would be subject to the same “ghost rule” as the “Estate of Deceased” inherited IRA (my father was 86 and taking RMDs) – or must we leave the estate open to house the single “Estate of Deceased” inherited IRA until the assets are fully distributed? Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2023-12-28 04:14
If the estate passes the IRA distribution through to you, you will probably receive a K 1 from the estate and have to report the income on your personal return for 2024 and pay taxes at your personal tax rate. The executor of the estate may be able to provide more details to you prior to the distribution. Perhaps the executor is using some of the IRA money to pay estate expenses, as estate beneficiaries will receive and be taxed on what is left.
Permalink Submitted by J C McEw on Thu, 2023-12-28 05:14
Wow- thanks for the lightning response, greatly appreciated. There’s a much larger 401k (again, no listed beneficiary) going through the estate, the first week of 2024 and from your posts it looks like I’ll be receiving a K-1 from the estate on that amount also in 2024. There is already plenty of funds in the estate account to pay administrative costs necessary to complete the probate process. There are no creditors. Just wondering, if I did receive a distribution from the estate before 2024 for the smaller IRA, if that would help offset this year’s estate income as an expense (and subsequently my personal tax rate might be less for each year)? Does this question make sense?