Estate inherited IRA. How distribute to heirs.
My aunt left her IRA to her estate. I am the executor of the estate. My banker said I can’t open new IRAs for the beneficiaries. They have to open an IRA and then my bank can do a tax free transfer. Question: How do I transfer aunt’s IRA funds to beneficiaries without the estate paying taxes? I want beneficiaries to pay the taxes.
Thanks
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-14 16:57
At least it sounds like this bank will cooperate with a directive from you to assign the inherited IRA out of the estate to separate inherited IRA accounts for each beneficiary. Many banks will not. The beneficiaries open inherited IRA accounts with the bank and then take their RMDs and other distributions from those accounts and receive their own 1099R for tax reporting. The estate does not have to report any of these distributions. If the beneficiary does not want to keep their inherited IRA at the bank, they can move it elsewhere by a direct transfer (NOT a rollover). Assignment of the IRA out of the estate does not change the RMD calculation. The 5 year rule applies if the decedent passed prior to their RBD, and the remaining single life expectancy of the decedent applies if they passed after RBD. Therefore, the age of each beneficiary is immaterial to the RMD calculation.
Permalink Submitted by John Spahn on Fri, 2025-03-14 18:23
Thank you for your response.
The beneficiaries will not open IRA accounts.
I want the bank to pay beneficiaries their share of the IRA directly with me (the executor) not touching the funds. Since the estate inherited the IRA, can I as executor tell bank to pay the IRA funds directly to the beneficiaries so estate does not have to pay the taxes? I want beneficiaries to pay all taxes.
Thanks again.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-14 18:40
If they make the distribution to you (estate), that does not mean that the estate will have to pay the taxes. The estate income tax return Form 1041 can pass the distribution through the estate on Form k1 to each estate beneficiary, and then the beneficiary reports the income on their personal tax return.
While that avoids the estate having to pay the tax, it has the following downsides. First, a total distribution means that the income will all be taxable in a single year for the beneficiaries. Second, it will require you to complete a 1041/K1 which you could avoid if the estate had no other income.
On the other hand, if separate beneficiary IRAs were opened, and the balance transferred to those accounts, the estate would no longer have to deal with the inherited IRA and the beneficiaries could split the income over at least 5 years. Of course, the larger the IRA balance is, the more benefit is realized from assignment. But if the balance it small enough that it makes no difference to the beneficiaries and they will cash it out right away, it probably does not matter as much.
Another factor is aunt’s year of death RMD. If she did not complete it, the estate (or estate beneficiaries) much complete it before the end of the following year. Of course, a total distribution would automatically complete this requirement.
Permalink Submitted by John Spahn on Fri, 2025-03-14 20:51
Thank you thank you 👍👍👍