Pension Lump Sum to an Estate

[dmertz]

Nothing has changed with regard to this.  A distribution from an inherited account of any kind paid to a non-spouse beneficiary is not permitted to be rolled over.  Various bills have been introduced in Congress that propose to change this under some circumstances, but none has made it out of committee.

[LudwigVan_fan]

From what you say, there is no possible roll over from trustee to trustee.  A lump sum was made and sitting in cash.

As to whom pays the tax, they depends in large part of whether any distributions are made to the beneficiaries.  If no distributions are made, then there is no distributable income deduction.  Unless the estate in its taxable year has other deductions to drop taxable income to zero or less, the estate will pay taxes.

However, if distributions are made to beneficiaries, then a computation is made to determine distributive income and what remains in the estate to be taxed.

Not an easy question to answer as there are many variables. 

[Deerlord7]

@LudwigVan_fan  Fidelity advised that a trustee to trustee rollover should be possible within the 60 day period. Granted, they haven’t always seemed to know what to make of this situation so I’m inclined to believe what you are saying but everyone I speak, even “experts”, have given different answers. Once creditors are paid off and probate closes the entire estate account will be disbursed in a one time distribution to my fathers trust, per his will. I was under the impression the estate would be subject to income taxes prior to distribution but you are making it seem as if the tax burden would fall on whoever receives the distribution?

[dmertz]

Whoever at Fidelity said that this distribution paid to the estate could be rolled over was simply wrong.  Given that the only option was a distribution to the estate, that incorrect information is of no real consequence in that there is nothing that could have been done to be able to continue to defer taxes on these funds.

As I explained earlier, the estate will generally pass this distributable net income along with the tax liability through to the trust and the trust will similarly pass this distributable net income and its associated tax liability  through to the trust beneficiaries (unless the trust document specifies otherwise).  The estate and trust will each file Form 1041 and issue Schedules K-1.  The estate can take deductions for certain fiduciary expenses, so the amount of taxable income passed through could be less than the full amount of the distribution.  Given the multiple tax returns involved, it might make sense to enlist the services of a CPA who is familiar with estates and trusts.

[LudwigVan_fan]

Not necessarily.  It depends.  I don't know if the estate is using a fiscal or calendar year.  But for sake of discussion, let's say the estate's first year ended 12/31/2022.  If there were no distributions made out of the estate before that date, then the estate will pay any taxes due on the computed taxable income.

Assuming the lump sum was in that tax year and the estate pays taxes on it, then when the distributions are made (going to another trust), any income say in 2022 would be passed into the trust's providence.

If the trust makes no distributions in 2022, it's taxable income would pay taxes.  If the trust makes distributions to beneficiaries, then there may or may not be tax paid by the beneficiaries.

An amount of money distributed to a beneficiary does not necessarily equal (and probably never will) the amount of income the beneficiary may or may not pay tax on.

There are a lot computations, timing, etc. in this scenario that only someone with the full facts and amounts can plan out.  What also comes into play are deductions.  Legal fees, executor fees, etc., etc.

I would also recommend that in this complicated situation, you seek the advice of someone knowledgeable in estates and trusts.  Either a tax attorney or CPA, enrolled agent, etc., that has knowledge in trust returns.