Should I have received a 1099-R for an inherited IRA distribution?

[CB243]

My wife's grandfather passed away in late 2020. In early 2021, the family trust manager (one of my wife's aunts) opted to do a total distribution on both the traditional IRA and Roth IRA that were in the family trust. The grandfather's final will indicated that both IRA's be split evenly among children and grandchildren, so I assume that she thought it would be easiest to manage the inheritance if everything was distributed all at once. She mailed checks to each of the beneficiaries (one check for each IRA), along with a causal note explaining that one check was for the traditional IRA and one was for the Roth IRA, and that we should report this on our taxes. There were no details provided beyond this note.

My wife and I paid estimated taxes on the traditional IRA throughout 2021, but these estimates were simply based on the entire value of the check we received, not considering any basis for the IRA.

Now that we are filing our 2021 taxes, I am wondering if we should have received a 1099-R for the money we received. Should a 1099-R have been issued for each IRA, even though we wouldn't pay any taxes on the Roth IRA? Should the aunt have given us more formal documentation beyond a check and casual note? Should the taxes we pay on the traditional IRA be based on the entire value of the funds received or just on the non-basis portion? Does the fact that this was part of a trust complicate the issue?

Talking about the deceased grandfather is a sensitive subject within the family so I want to avoid asking an unnecessary question to the aunt. But if it is necessary for us to correctly file our taxes, I will of course want to make sure that we get the correct forms.

[dmertz]

Unless the trust chose to pay the taxes on the taxable portion of these distributions, which usually doesn't make sense, you should receive a Schedule K-1 (Form 1041) from the trust reporting the taxable amount of these distributions that is to be reported on your tax return for the year that contains the end-date of the period in which this distribution to the trust occurred.  Given that the distribution from the IRAs occurred in early 2021, there's a good chance that that would mean receiving the Schedule K-1 for reporting on your 2021 tax return, but if the trust uses a fiscal tax year that ends early in the year, it could be 2022 income to you instead.  So what you need to find out is if the trust is paying the income taxes or if the trust is going to issue Schedule's K-1 to the beneficiaries for the beneficiaries to pay the taxes.  The casual note should have already included this information for the beneficiaries' tax planning purposes.

[CB243]

Thanks for the feedback. I will go ahead and ask the aunt for more information then.

[CB243]

I spoke with the aunt and she said that all the tax on the IRA's is being paid by the children, not the grandchildren (my wife is one of the grandchildren) so there is no need to issue a K-1 to any of the grandchildren. Is this true? This seems like a super weird way of managing the trust to me, but honestly I'm not really sure what is normal. If my wife received funds from the trust, should it be required that she receive a K-1, even if the taxable amount is zero for some reason?

[CB243]

Just to be clear, she plans on sending K-1's to all the children (e.g. my wife's parents) but not to the grandchildren (e.g. my wife). To me, I would assume that either all or none receive K-1's...

[dmertz]

Yes, this does sound strange.

You said that the will indicated that the IRA was to be split evenly between the children and grandchildren, but the governing document is the trust document, not the will (unless by "trust" you mean your grandfather's estate and there actually is no trust that is the beneficiary of the IRA).  Since there is apparently distributable net income (indicated by the fact that there are at least some Schedules K-1 being generated to pass through taxable income), Schedules K-1 must be sent to all listed beneficiaries and the income passed through to the beneficiaries equally and the income reported on each beneficiary's income tax return.

Perhaps there is a trust that lists only children, but it was your grandfather's desire that the equal sharing included grandchildren.  In that case, distributions and Schedules K-1 would be given to the children and any money given to grandchildren would be gifts from the children to the grandchildren.  However, the trustee of the trust has no authority to force the children to gift money to the grandchildren and could only send the money to the grandchildren on behalf of the children with the agreement of the children.  Depending on the amounts, that might trigger the requirement that the children file gift-tax returns.

If you were a potential legatee listed in the will, you should probably have received a copy of the will as an interested party.  It would seem that the same would be true of a trust, but I have no experience with that.