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?

[dmertz · Accepted solution]

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]

@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]

If you name your estate as the beneficiary of your IRA, then your will controls who gets it. The biggest problem with having your estate as your IRA beneficiary is that the death distribution options will be severely limited.

Under IRS rules, your estate is not considered a “designated beneficiary” which means it has no life expectancy and can’t take advantage of the “stretch IRA” concept. So, if you die before your required beginning date (April 1 of the year after you turn age 70 ½), the IRA will have to pay out all funds to the estate within five years. If you die after your required beginning date, your IRA will have to make distributions to the estate over your remaining single life expectancy. What this all means for the beneficiaries who eventually get your IRA funds through your estate is that they’ll have to take the funds sooner, and thus likely pay more taxes than if you had named than as the direct beneficiary of your IRA.
<a rel="nofollow" target="_blank" href="https://www.irahelp.com/slottreport/why-you-should-not-name-your-estate-ira-beneficiary">https://www...>

[dmertz]

Yes, I meant exactly that.  By splitting the IRA inherited by the estate into separate inherited IRAs, one for each estate beneficiary's share, the separate inherited IRAs can be distributed to the estate beneficiaries intact.  The estate beneficiaries become successor beneficiaries.  It's similar in nature to a successor beneficiary inheriting an IRA previously inherited by an individual.  The result is that the inherited IRAs for the benefit of the successor beneficiaries being subject to the same RMDs, the beneficiaries receiving the same money, and the beneficiaries paying the same taxes as if the estate continued, distributions were paid to the estate, and then this income to the estate was passed through to estate beneficiaries.  Numerous PLRs have invariably determined that this is acceptable.  Some custodians are not savvy enough to know that this is permissible, so one might have to transfer the estate's inherited IRA to a more competent custodian who will accommodate the splitting and distribution of the separate inherited IRAs.

Estate as beneficiary means that the estate is the beneficiary, not that there is no beneficiary.  There is *always* a beneficiary.  It does meant that there isn't a "designated" beneficiary, that the beneficiary is not an individual.

(The situation is different of the account is in a qualified retirement plan like a 401(k).  If the deceased's estate is the beneficiary of a 401(k) account, the only option is distributions to the estate.  Only a designated beneficiary can roll an inherited 401(k) to an inherited IRA, and an estate cannot be a designated beneficiary since the estate is not an individual.)

[saltygrub]

@dmertz Do you know of a competent custodian that would accommodate splitting an estate IRA to individual inherited IRAs?  The conversations I've had with our current custodian are not getting us anywhere.  Thanks!

[dmertz]

I haven't had any direct experience with doing so.   Unfortunately, the reference page on Natalie Choate's web site (<a rel="nofollow" target="_blank" href="https://www.ataxplan.com/">https://www.ataxplan.com/</a>) discussing this issue no longer seems to exist, so I can't provide a link.  But the IRS has issued many PLRs related to this, indicating the IRS's general position that estates are permitted to distribute the inherited IRA by splitting to a different inherited IRA account for each of the estate beneficiaries.  Doing so does not change the RMD requirement established by the fact that the estate inherited the IRA, and, since the income to the estate will be distributed to the estate beneficiaries for taxation to the estate beneficiaries anyway, so doing so does not prejudice the government; the IRS still gets the same tax income.  It simply means that the estate need not remain open to be the middleman.

[saltygrub]

Thanks!  I appreciate it.

[Critter]

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

[lacopp50]

Hi,  My dad a passed away and had my mom as his beneficiary.  My mom then passed away before she had a chance to do the paperwork to get the IRA into her name with me and my sisters as beneficiaries.  They were both in their late 70's when they passed.  The IRA custodian says that they cannot transfer the IRA into beneficiary IRAs, one for me and one for my sister and that the IRA has to go into the Estate.  My sister and I are the only beneficiaries for the estate.  We have been trying to get this straightened out now for a year and a half.  Meanwhile the IRA is still in my Dad's name.  is there any way of getting this IRA into Beneficiary IRA's?  it seems like the IRS allows that but i don't know.  Any help would be appreciated.  Thanks

[dmertz]

In what year did your father pass away?

In what year did your mother pass away?

The answers to these questions are needed to determine if the IRA became owned by your mother by default.  If it did become owned by your mother by default, the IRA custodial agreement may provide for a different default beneficiary than the default being your mother's estate.

Has it been less than 9 months since the death of your father?

Did your father name contingent beneficiaries?

Regardless, unless the IRA custodial agreement says otherwise for these circumstances, the IRA inherited by your mother and be transferred intact to an inherited IRA for the benefit of your mother's estate and from there split into separate inherited IRAs for the benefit of the estate beneficiaries.  There is nothing in the tax code that prohibits this.  In some cases the IRA will be transferred directly to inherited IRAs for the benefit of the estate beneficiaries by the direction of the executor, skipping the intermediate titling.

[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]

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.  

[dmertz]

Except in cases where it's necessary for an estate or trust retain income and resulting in the estate paying income taxes, NEVER have the custodian withhold taxes on an IRA distribution paid to an estate or trust!  Decline such withholding when an estate or trust is a beneficiary.  The credit for tax withholding cannot be passed through on a Schedule K-1.  If you have the custodian withhold taxes you'll have to keep the estate open an extra year to be able to receive the refund, distribute the refund to the estate beneficiaries and file another Form 1041 with Schedules K-1.

As Critter said, even if you had the custodian withhold taxes, $35K would likely be way too high since you will be passing the income through to the estate beneficiaries to be taxed on the beneficiaries' tax returns at their individual marginal tax rates.  Default tax withholding on an IRA distribution is 10% but you have the option to have either 0% withheld or more than 10% withheld.

[Kkgulbrandsen]

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.