My Aunt designated her IRA beneficiary as her Estate (via poor advice from my Grandmother) She passed away at 69 years old a few months ago and my sister and I are the sole heirs in accordance with her will. The bank said that since the IRA’s beneficiary is the Estate, the money then has to be put in the Estate bank account and we are unable to just open inherited IRA’s. Do we have any options or will the IRA be subject to the 39.6% tax I read about. Thanks in advance for any and all information.
Click this link for detailed info on when the Estate is the IRA Beneficiary.
My answer in the tread referenced above provides some similar information but does not directly address all of the specifics of your situation.
I assume that the bank in question is the custodian of this IRA. A lump-sum distribution to the estate is only required if the bank's IRA agreement signed by your aunt requires it. Otherwise, the tax code does not require a lump-sum distribution to the estate. Instead, the funds can be trustee-to-trustee transferred to an inherited IRA with the estate as beneficiary. At the direction of the executor or personal representative of the estate this inherited IRA can then be split into separate inherited IRAs, one for each of the estate beneficiaries and distributed out of the estate intact to each of the estate beneficiaries, allowing the estate to be closed. Otherwise, if the inherited IRA is retained in the estate the estate would have to remain open as long as the IRA still contained funds that were being distributed to the estate. Whether or not this split is done, because your aunt died before her required beginning date for RMDs and the beneficiary was the estate (not an individual), the 5-year rule applies, requiring only that the inherited IRAs be fully distributed by the end of the fifth year after the year of death. (It seems that she died in late 2019, so that would mean that the inherited IRA(s) must be fully distributed by the end of 2024.)
Any amounts distributed to the estate would generally be passed through on Schedules K-1 to the estate beneficiaries to be taxed that the beneficiaries' tax rate; the estate would then take a deduction for this Distributable Net Income so it would not be taxed at estate tax rates.
Depending on the amount involved and the particular desires of each of the beneficiaries, with a separate inherited IRA established for each estate beneficiary, each estate beneficiary could separately decide how much to distribute each year between now and 2024.
Thank you SO much for this detailed information - really appreciate you taking the time for us! What you described would be a great scenario for my sister and I - next step is for my dad to call the bank and confirm about the IRA agreement and hopefully we can do as you outlined!
@MarilynG1 @dmertz "the beneficiary was the estate (not an individual), the 5-year rule applies, requiring only that the inherited IRAs be fully distributed by the end of the fifth year after the year of death."
doesn't this contradict what else you said?. if the IRA is parceled out as suggested, to individuals, the stretch IRA option should be available and the five year distribution optional.
If the beneficiary designated to the IRA custodian by the participant is not an individual and the participant had not yet reached the Required Beginning Date for RMDs, the 5-year rule applies; there is no option. Subsequent parceling out of the inherited IRA to an individual beneficiary does not change the fact that the estate was the beneficiary indicated by the participant and that the 5-year rule applies.
See Beneficiary not an individual in IRS Pub 590-B: https://www.irs.gov/pub/irs-pdf/p590b.pdf