IRA with estate as beneficiary

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dlw322
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IRA with estate as beneficiary

Post by dlw322 »

I have an aunt that passed away in 2018. She was not married. We just found a Traditional IRA that had her estate listed as the beneficiary. I have read some old articles that say the most tax efficient way to disperse the funds would be to have each beneficiary of the estate open an inherited IRA and have their portion deposited in there. The problem is that there are 22 beneficiaries of the estate. Getting 22 people to do anything is difficult at best, getting them to open an inherited IRA will be next to impossible.

There is approximately 65k in the IRA. I figured I'd come here to the Bogleheads to get some ideas on the best way to proceed.

Thanks!
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retired@50
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Re: IRA with estate as beneficiary

Post by retired@50 »

dlw322 wrote: Tue May 04, 2021 7:34 pm I have an aunt that passed away in 2018. She was not married. We just found an IRA that had her estate listed as the beneficiary. I have read some old articles that say the most tax efficient way to disperse the funds would be to have each beneficiary of the estate open an inherited IRA and have their portion deposited in there. The problem is that there are 22 beneficiaries of the estate. Getting 22 people to do anything is difficult at best, getting them to open an inherited IRA will be next to impossible.

There is approximately 65k in the IRA. I figured I'd come here to the Bogleheads to get some ideas on the best way to proceed.

Thanks!
An interesting dilemma.
Was the aunt over 70.5 years old when she passed? In other words, was she taking required minimum distributions from the account?

Has the estate been taking RMDs since her death? Probably not since you "just found" this IRA. I don't really know if an estate can take RMDs.

You could have some tax compliance rule issues to deal with. I'd suggest working with a CPA to help sort that part out.

Depending on the outcome of the tax issues, if there is any money left, you could donate it to charity, or you could talk 21 people into disclaiming their cut of the money, and give it to the least wealthy remaining person, or the person in the lowest tax bracket. That way withdrawals will be at a low marginal tax rate.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
trirod
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Re: IRA with estate as beneficiary

Post by trirod »

Assuming that each beneficiary gets an equal share, that’s around $3,000 each. Seems like that would have a minimal tax impact on any beneficiary so why not just distribute the entire IRA balance to the beneficiaries?
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dlw322
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Re: IRA with estate as beneficiary

Post by dlw322 »

The aunt was over 70.5 and (I'm assuming) taking RMDs. I'm not the executor of the estate so I'm not sure the status of the RMDs since her passing. That's also something that will have to be figured out.

That sounds like an interesting idea to have 21 people disclaim and one person take the distribution and pay the taxes. they could then "gift " some money back to the other 21 after taxes are paid. That might be less taxing than the estate taxes that would have to be paid.
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dlw322
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Re: IRA with estate as beneficiary

Post by dlw322 »

trirod wrote: Tue May 04, 2021 7:47 pm Assuming that each beneficiary gets an equal share, that’s around $3,000 each. Seems like that would have a minimal tax impact on any beneficiary so why not just distribute the entire IRA balance to the beneficiaries?
If it was just disbursed to each beneficiary wouldn't it have to go through the estate and file a 1041 and pay the estate tax rate on the entire balance? Then distribute the remaining to each beneficiary?
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jeffyscott
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Re: IRA with estate as beneficiary

Post by jeffyscott »

dlw322 wrote: Tue May 04, 2021 7:50 pm The aunt was over 70.5 and (I'm assuming) taking RMDs. I'm not the executor of the estate so I'm not sure the status of the RMDs since her passing. That's also something that will have to be figured out.

That sounds like an interesting idea to have 21 people disclaim and one person take the distribution and pay the taxes. they could then "gift " some money back to the other 21 after taxes are paid. That might be less taxing than the estate taxes that would have to be paid.
I think that would be called tax fraud. While it may be unlikely to be caught, given the small amount of money, is it really worth it to avoid paying tax on $3000?

Federal estate taxes only applied at about $5 million in 2018. If the estate was subject to that or a state estate tax, you don't avoid it by sending the money to one of the 22 beneficiaries.
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dlw322
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Re: IRA with estate as beneficiary

Post by dlw322 »

jeffyscott wrote: Wed May 05, 2021 7:54 am
dlw322 wrote: Tue May 04, 2021 7:50 pm The aunt was over 70.5 and (I'm assuming) taking RMDs. I'm not the executor of the estate so I'm not sure the status of the RMDs since her passing. That's also something that will have to be figured out.

That sounds like an interesting idea to have 21 people disclaim and one person take the distribution and pay the taxes. they could then "gift " some money back to the other 21 after taxes are paid. That might be less taxing than the estate taxes that would have to be paid.
I think that would be called tax fraud. While it may be unlikely to be caught, given the small amount of money, is it really worth it to avoid paying tax on $3000?

Federal estate taxes only applied at about $5 million in 2018. If the estate was subject to that or a state estate tax, you don't avoid it by sending the money to one of the 22 beneficiaries.
I'm just trying to help out and find the simplest, tax efficient way to disburse the money. This was definitely not a taxable estate.
  • Is it allowed to just disburse the funds equally to each beneficiary of the estate and they claim the $3,000 on their individual tax returns since the estate was listed as the beneficiary of the IRA?
  • If we can disburse the funds to the individuals and they claim the distribution on their tax returns would a 1041 need to be filed?
Double Deacon
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Re: IRA with estate as beneficiary

Post by Double Deacon »

OP

First, have the executor consult with legal counsel. An executor cannot distribute estate assets as he/she chooses. The Executor must follow the Will (if testate) or the laws of intestate distribution of the estate where the estate is located (if intestate). Full disclosure, I am a lawyer.

Second, have the executor consult with a tax preparer or CPA. If in fact the decedent's estate is named as beneficiary, or if there is no named beneficiary, the holder of the IRA will pay the IRA funds to the estate and will send the estate a 1099. The estate income brackets start very high and the estate will owe income tax on the distribution of the IRA funds.

It is possible, if timely done, for the estate to pass the income to the beneficiaries or heirs, to be taxed at hopefully their lower tax bracket.

Seek legal and tax advice before you do anything with this estate.

Double Deacon
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jeffyscott
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Re: IRA with estate as beneficiary

Post by jeffyscott »

dlw322 wrote: Wed May 05, 2021 8:16 am
jeffyscott wrote: Wed May 05, 2021 7:54 am
dlw322 wrote: Tue May 04, 2021 7:50 pm The aunt was over 70.5 and (I'm assuming) taking RMDs. I'm not the executor of the estate so I'm not sure the status of the RMDs since her passing. That's also something that will have to be figured out.

That sounds like an interesting idea to have 21 people disclaim and one person take the distribution and pay the taxes. they could then "gift " some money back to the other 21 after taxes are paid. That might be less taxing than the estate taxes that would have to be paid.
I think that would be called tax fraud. While it may be unlikely to be caught, given the small amount of money, is it really worth it to avoid paying tax on $3000?

Federal estate taxes only applied at about $5 million in 2018. If the estate was subject to that or a state estate tax, you don't avoid it by sending the money to one of the 22 beneficiaries.
I'm just trying to help out and find the simplest, tax efficient way to disburse the money. This was definitely not a taxable estate.
  • Is it allowed to just disburse the funds equally to each beneficiary of the estate and they claim the $3,000 on their individual tax returns since the estate was listed as the beneficiary of the IRA?
  • If we can disburse the funds to the individuals and they claim the distribution on their tax returns would a 1041 need to be filed?
I don't know the requirements for filing a 1041, nor the details about how an inherited IRA would be distributed/liquidated. But I think each beneficiary can choose whether or not put their share in an inherited IRA or not?

I don't think it is worth the hassle of setting up an inherited IRA to receive ~$3000, which may then need to be withdrawn within a few years anyway (due to there having been no RMDs for a couple years, it might mean all must be withdrawn within 5 years of the death of owner). And, yes, if the IRA is liquidated and distributed (or distributed and liquidated, if that is the order of operations :?: ), my understanding is that it means each beneficiary would include the ~$3000 on somewhere on their tax return as taxable income.
bsteiner
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Re: IRA with estate as beneficiary

Post by bsteiner »

As others have pointed out, the executor could distribute the inherited IRA in kind so that each residuary beneficiary of the estate would have an inherited IRA. However, that would be a substantial amount of effort.

The executor should take the required distributions (or take more than the amount required if the executor doesn't want to keep the estate open just for the IRA), add the proceeds to the estate, use the administration expenses against the IRA proceeds (unless they're claimed as estate tax deductions), and make distributions to the beneficiaries as appropriate.
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quantAndHold
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Re: IRA with estate as beneficiary

Post by quantAndHold »

Since you’re not the executor, this isn’t your circus or your monkeys. But....

The most tax efficient handling of this would be to distribute the IRA in kind to the 22 heirs. And yes, the heirs will have to set up their own accounts. When I was executor of Dad’s estate, I provided the death certificate and particulars of the will to the custodian, and made sure RMD’s were up to date. That company required the heirs to set up inherited IRA accounts with them, and then if they wanted to either withdraw or transfer the money to another custodian, they could do that themselves. In our case, it was also about $3,000 apiece. Once I set things up with the custodian, I gave each of the heirs a cheat sheet with a phone number and the info they needed to get the account set up, then it was up to them. The custodian wouldn’t have let me do it for them anyway.

BTW, I learned how to do this by calling the custodian to report his death. My experience is mutual fund companies and brokerages all have estate departments that do this stuff all day long, and know what they’re doing.
Topic Author
dlw322
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Re: IRA with estate as beneficiary

Post by dlw322 »

quantAndHold wrote: Wed May 05, 2021 9:28 am Since you’re not the executor, this isn’t your circus or your monkeys. But....

Thanks everyone. This is definitely not my circus or monkeys....heck I'm not even one of the 22 beneficiaries. :D I did send a link to the executor so she can follow this thread. This will be helpful to her as she figures this out.
MarkNYC
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Re: IRA with estate as beneficiary

Post by MarkNYC »

There is also the issue of the delinquent RMD for 2019, and possibly for 2018 also if the IRA owner died before taking her RMD for the year.

Since there was no designated beneficiary for the IRA, if the executor assigned the interest in the IRA to each of the estate beneficiaries, then each beneficiary would have to take RMDs based on the decedent's age in the year of death, rather than based on the age(s) of the beneficiaries. So if the decedent was age 83 then the IRA would have to be fully distributed within the next 6 years.

Given the amount in the IRA and the number of estate beneficiaries, I think the most practical solution is for the IRA to be re-titled as an inherited IRA for the estate, have the estate take a full taxable distribution from the IRA, then file Form 1041 to report the income. After deducting any allowable expenses, the estate would distribute all residual amounts to the 22 estate beneficiaries and each beneficiary would receive a K-1 reflecting his/her share of the taxable income from the estate.
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