IRA payable to estate - timing of distributions to beneficiaries

[Romni22]

I am the executor of my mother's estate. She has two IRAs that must pass through probate (the sole beneficiary of both accounts was my stepfather who predeceased her by 3 months this year and there are no secondary beneficiaries). These are very modest accounts (total under $100K) and the proceeds will eventually be distributed to me and my 5 siblings and stepsiblings in equal parts according to the will.  The estate will incur significant income tax liability for cashing out these accounts (up to 37%), but it may deduct the distributions made according to the will in order to avoid income tax liability. My question is one of timing. Do I need to make the distributions to the heirs in the same tax year the estate receives the proceeds from IRA accounts? I'd like to cash out the IRA's this year to consolidate all cash assets but probably won't have permission Probate Court to make distributions to the heirs until next year.  Thanks for any input. 

[M-MTax]

The year you cash out the IRAs is the year it will be taxed. The estate will pay the tax unless it distributes the cash to the benes (persons in the will) or you can pass the cash out to the benes and they will pay tax due, and that's better than the estate having to pay the tax because the estate income tax rates are nuts. Don't forget that an estate can choose a fiscal year.

[Romni22]

Thanks that's what I thought. I received an EIN letter from the IRS that indicates the estate's income tax return is due next April 15th. Since I won't have Probate authority to make distributions to heirs until early 2022, I guess I have to postpone cashing out the IRAs until next year or request a different fiscal year for filing the return. 

[M-MTax]

Sounds like you just chose a calendar year for the estate but the estate's tax year is based on the first return it files so you can make it from the date of death to the last day of the month of the following year.....not to exceed 12 months.......like May 15, 2021 to April 30, 2022.

[Romni22]

It's amazing I found you (or you found me I should say!).  I had a paralegal from my probate attorney's office file for the EIN so she must have indicated a calendar year return (thus the notice assigning the EIN states I must file the 1041 by 4/15/22). Do you know if I have to make a request to the IRS to change it to the estate's fiscal year? Your example of May 15, 2021 to April 30, 2022 happens to be exactly the dates I contemplated based on my mother's date of death. If I'm able to use those dates, I will be able to close out the estate next year without having to wait until 2023 to file the estate's 1041. Thanks so much!

[M-MTax · Accepted solution]

You don't have to make a request to change the year. The estate's tax year will be based on the first return you file for it. Choose a fiscal year and enter the dates....it's that simple.

[Romni22]

Thanks so much for your help!

[catheco]

Can you file a first and final year ?

One IRA distribution of $30K/ no other  income estate will pay the taxes and distribute the balance. There is some legal and admin expenses 

R K-1 to the 3 beneficiaries required since the taxes are paid ? or just file the estate return and pay the taxes? 

Thanks in advance for any guidance

[DianeW777]

Yes, you can file a first and final estate return, Form 1041.

Whether the estate pays the tax, or whether it must be distributed to the beneficiaries is based on how the estate was set up. If there is no language about that then you can choose. If, in fact, the estate does pay the tax then there is nothing to enter on the K-1s, and the beneficiaries will have no income to report.

Unless the amount involved is small, it's usually beneficial to pass the income through due to the increasing tax brackets of the estate.  Currently, the estate is taxed at 10%-37%.  Income at or above $13,050 is taxed at the highest rate, based on the current instructions.

• IRS Instructions for Form 1041 (the 2021 version is in draft at this time however the link will work when finalized)