IRA with no listed beneficiaries in an estate - distribution & taxes

[M Paquette]

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?

 

[Dash man]

The IRA will have to be probated and the funds distributed among beneficiaries, who then can put the funds into inherited IRAs within 60 days to avoid immediately paying taxes.

 

[RunningBum]

My understanding is that if no beneficiaries are listed, the IRA is fully distributed and taxed to the estate unless there is a surviving spouse. I've always heard that it is vital to name beneficiaries for your IRAs, including inherited ones, for this reason. But I don't know for sure as my remaining parent no longer has an IRA, and I am making certain to name a beneficiary for mine.

 

[iloveyoga]

My understanding is that if no beneficiaries are listed, the IRA is fully distributed and taxed to the estate unless there is a surviving spouse. I've always heard that it is vital to name beneficiaries for your IRAs, including inherited ones, for this reason. But I don't know for sure as my remaining parent no longer has an IRA, and I am making certain to name a beneficiary for mine.

This is how we did it when I worked in the retirement business. If there was no beneficiary, we paid to the estate.......

 

[M Paquette]

That’s my understanding as well. What I want to do is pass that payment through as K-1 1041 estate income, so its taxed at individual rates among the heirs rather than as estate income at a higher rate.

Because there are no beneficiaries names it looks like the IRA can’t be rolled over to new IRAs, but must be distributed within 5 years, and of course before the estate is closed.

 

[DayDreaming]

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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?

I had a similar situation and just filed the 1041 this week. My mother had an IRA that listed myself and my brother as beneficiaries, so we each got half of that with no problem. She had another small IRA with my father (deceased) as beneficiary, and no secondaries listed. So this one had to be paid to the estate, and was deposited in the bank account along with all other estates proceeds. That IRA issued a 1099-R to the estate, showing the gross distribution as fully taxable.

To answer your question, no special treatment of the funds was needed, it was simply an IRA withdrawal. The 1099-R shows the 1) Gross Distribution and 2a) Taxable amount as the same, the box "total distribution" is checked, the box 7) distribution code is 4 (death).