M Paquette
Moderator Emeritus
I’m administering an estate of a deceased brother, who had no spouse, children, or surviving parents. Under California probate law that makes his four surviving siblings, including me, heirs of the estate. There was no will or trust, and no beneficiaries or POD listed for any accounts. There isn’t all that much in the estate besides a small paid-off condo and an IRA, again with no beneficiaries.
The IRA had been run down fairly far by my brother, and the tax impact of distributing it four ways is fairly small. If emptying the account is seen as income to the estate, the tax bite is huge (37% Federal), but if the estate passes through income and losses then the tax bite will be much smaller, as we are all fairly low-income folks. We don’t want to keep the probate estate open for years to do the 5 year minimum withdrawal thing (5, not 10 as the IRA had no named beneficiaries), but would rather wrap it up quickly, for assorted personal reasons. (There’s no guarantee I’ll live that long, for one!)
So, the current plan is to liquidate the IRA, directing the custodian to make no tax withholding, and pass the income through via the K-1 1041 filing we will make as we close the estate. That’s straightforward enough. Yes, I will be engaging a tax person to generate the 1041 and California 541 filings, just to get the paperwork right. (The estate includes several other accounts, the real estate, a bunch of cryptocurrency, and a bunch of expenses.)
The question: Is any special treatment of the IRA funds needed? Can they be put into the estate bank account used to collect other assets, and at distribution passed along, along with the K-1 for each beneficiary? Or do I need the IRA custodian to do something special, such as issuing separate checks to the estate beneficiaries? Or something even more complex?
The IRA had been run down fairly far by my brother, and the tax impact of distributing it four ways is fairly small. If emptying the account is seen as income to the estate, the tax bite is huge (37% Federal), but if the estate passes through income and losses then the tax bite will be much smaller, as we are all fairly low-income folks. We don’t want to keep the probate estate open for years to do the 5 year minimum withdrawal thing (5, not 10 as the IRA had no named beneficiaries), but would rather wrap it up quickly, for assorted personal reasons. (There’s no guarantee I’ll live that long, for one!)
So, the current plan is to liquidate the IRA, directing the custodian to make no tax withholding, and pass the income through via the K-1 1041 filing we will make as we close the estate. That’s straightforward enough. Yes, I will be engaging a tax person to generate the 1041 and California 541 filings, just to get the paperwork right. (The estate includes several other accounts, the real estate, a bunch of cryptocurrency, and a bunch of expenses.)
The question: Is any special treatment of the IRA funds needed? Can they be put into the estate bank account used to collect other assets, and at distribution passed along, along with the K-1 for each beneficiary? Or do I need the IRA custodian to do something special, such as issuing separate checks to the estate beneficiaries? Or something even more complex?