I am the executor of an EState, the beneficiary of the IRA is the Estate. When I take a yearly distributtion what should the estate be taxed at?

Forum|Forum|7 years ago
June 6, 2019
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Best answer by dmertz

Distributions from an IRA are treated as ordinary income. Income to the estate from an IRA is reportable on Form 1041 line 8. However, this Distributable Net Income is typically passed through to the estate beneficiaries as Income in Respect of a Decedent and such income distributed to estate beneficiaries is reported to beneficiaries on Schedule K-1 (Form 1041) box 5 as Other Portfolio and Nonbusiness Income and taken as a deduction on Form 1041 line 18, so it ultimately does not get taxed at estate tax rates but is instead taxed at the beneficiaries' marginal tax rates.

The estate income tax brackets for the final taxable income reported on Form 1041 line 22 are:

     $0 $2,550 15%
  $2,550 $5,950 25%
  $5,950 $9,050 28%
  $9,050 $12,400 33%
$12,400     ----- 39.6%

So even moderate amounts of estate-taxable income are taxed at 39.6%.

To avoid having to keep an estate open to receive yearly distributions from the IRA, the estate would usually want to split the IRA into inherited IRAs for the benefit of each of the estate beneficiaries and distribute these inherited IRAs intact, without any distributions from the IRA being made to the estate. Estate beneficiaries would be successor beneficiaries so they would still have to base RMDs on the estate being the original beneficiary of the IRA (beneficiary not an individual).

D

dmertzAnswer

Level 15

Distributions from an IRA are treated as ordinary income. Income to the estate from an IRA is reportable on Form 1041 line 8. However, this Distributable Net Income is typically passed through to the estate beneficiaries as Income in Respect of a Decedent and such income distributed to estate beneficiaries is reported to beneficiaries on Schedule K-1 (Form 1041) box 5 as Other Portfolio and Nonbusiness Income and taken as a deduction on Form 1041 line 18, so it ultimately does not get taxed at estate tax rates but is instead taxed at the beneficiaries' marginal tax rates.

The estate income tax brackets for the final taxable income reported on Form 1041 line 22 are:

     $0 $2,550 15%
  $2,550 $5,950 25%
  $5,950 $9,050 28%
  $9,050 $12,400 33%
$12,400     ----- 39.6%

So even moderate amounts of estate-taxable income are taxed at 39.6%.

To avoid having to keep an estate open to receive yearly distributions from the IRA, the estate would usually want to split the IRA into inherited IRAs for the benefit of each of the estate beneficiaries and distribute these inherited IRAs intact, without any distributions from the IRA being made to the estate. Estate beneficiaries would be successor beneficiaries so they would still have to base RMDs on the estate being the original beneficiary of the IRA (beneficiary not an individual).

fanfare

Level 15

@dmertz are you saying the executor can take an IRA with no beneficiaries (or the Estate as beneficiary) and deposit the money into Inherited IRAs. I don't think you meant that.
Also is the "Estate as beneficiary" the same as "No beneficiary"? I thought at least for the latter, the IRA is dissolved.

Critter

Level 15

Bad choice to leave the IRA in the estate since the estate tax rates are so high ... seek professional assistance to see what your options are ... https://www.putnam.com/literature/pdf/II952.pdf

https://www.irahelp.com/slottreport/what-happens-when-estate-inherits-ira

A

Anonymous

I am the executor of an estate where the decedent (he was 60 and he inherited the IRA from his mother the she was 68) had no will, no beneficiaries, and no immediate heirs. Half the estate will be going to about 20 people on his distant fathers side and about 18 on his mothers side. We found an IRA with about $94,000 and I got it moved to an inherited IRA in the name of the estate. I am not going to have all these people open up Inherited IRAs but instead distribute it to an estate account where when I finally get court approval will be distributing it along with the other assets to the heirs in their allocated percentages. My main question is that when I do the distribution should I have the custodian withhold the calculated taxes from that table you have listed at the beginning of the conversation? If so, I am looking at about $35K going to the IRS and $58K net to the estate.

Critter

Level 15

If the estate is NOT going to pay the taxes at the estate level on the entire distribution but instead are going to pass it thru to the beneficiaries then you do NOT have taxes withheld ... each bene will pay taxes on their own personal returns at their own rates.

K

Kkgulbrandsen

Level 2

I would like to know how to do this as well. I am in the exact same situation and I have been told that the IRA cannot go to my siblings and me — that it has to go to pay my moms creditors.

My father passed in December 2018, with an IRA. My mom was the sole beneficiary, and it did not get in her name before she passed in February 2019. I am the executor. The IRA is now in my mom’s name, but it’s just sitting there. It’s not a large amount, but it would be helpful to us kids.

D

dmertz

Level 15

Paying the creditors of the estate takes precedence over making distributions to the estate beneficiaries. Certainly any portion of the IRA inherited by you mother's estate, which is apparently the default beneficiary, that is needed to pay off creditors of the estate cannot be distributed to estate beneficiaries. I imagine that the estate would also be responsible for paying the income taxes on any amount distributed to the estate from the IRA to pay the creditors and the income taxes, so the minimum amount needed to be distributed from the IRA to the estate is likely to be larger than just the amount needed to pay the creditors other than the tax authorities. The amount used to pay the creditors and the income taxes would not be available to pass through to the estate beneficiaries as Distributable Net Income, so it appears that this portion would be taxed at estate income tax rates.

Critter

Level 15

I highly recommend you seek local professional assistance with getting mom's final return and the estate return done correctly ... until both are completed you are not off the hook for any taxes either of them owe.