IRA BDA's - Probate Estate Expenses - Decedent vs Estate Tax Filing

[Steverino78]

I am PR of my brother's probate.  Pertinent details:  He died late January 2024 age 60; Two weeks prior to death, he withdrew $4k from his IRA; Vast majority of his assets were in his IRA; He died intestate.

2023 Tax filing:  Because he was alive throughout 2023, I filed his taxes (via his SS#) as PR of his estate.

2024 Tax filing:  The 2024 $4k IRA distribution induces a 2024 tax liability.  (I realize this should have been paid in sync with the withdrawal.  His estate had no liquidity until late 2024.) 

Upon notice of death, his IRA was converted to an IRA-BDA, still untouched and parked in SPAXX at Fidelity. 

(I will henceforth refer to this as the Mothership.) The five sibling beneficiaries (including myself as PR) have not yet established their respective BDA accts.  Point-being:  It is my understanding that the existing Mothership IRA-BDA is owned by the Estate (and hence, identifified by the IRS via the IRS-provided Estate EIN).  (?)

Prior to the Mothership being emptied into the five soon-to-be orbitting satellite BDA's, I (as PR) need funds from this Mothership to pay Estate and Probate expenses.  These Estate-obligated expenses will induce a tax liability, assumedly levied against the Estate.  

So... 

As he was alive for three weeks of 2024, will I be filing his 2024 return for the last time via his SS#? 

Or, am I now expected to file via the IRS-provided Estate EIN? (I believe via Form 1041?)

Or, am I expected to file two returns, acknowledging his three living weeks of 2024 and posthumous Estate?

Seems clear the Estate must pay both his $4k pre-death distribution and the forthcoming Mothership IRA-BDA distribution.  But the circumstances for withdrawal were different.  Hence, these questions. 

Thank you in advance for reading to the end.  🙂

[dmertz · Accepted solution]

If your brother had sufficient income in 2024 or there were taxes withheld form the IRA distribution, you'll need to file a 2024 tax return for your brother.  Any tax liability would be an expense of the estate.

If the IRA-BDA was established for the benefit of your brother's estate, it implies that your brother had not designated any beneficiaries for the IRA.  However, if your brother did designate beneficiaries, the IRA-BDA has been established and maintained for the benefit of those beneficiaries, not the estate, and the estate has no direct involvement with the IRA-BDA.  (Given that the IRA-BDA has not yet been subdivided, I'm guessing that there were no designated beneficiaries, but you need to confirm that with Fidelity.)

If the IRA-BDA is maintained for the benefit of the estate, you can request distributions and use the funds to pay the estate expenses.  Such a distribution would be reportable on an estate income tax return Form 1041 (if income to the estate, including these distributions, is sufficient to require filing).  If instead the siblings are the beneficiaries of the IRA-BDA, any distributions would have to be paid to these beneficiaries and the estate would need to ask the beneficiaries to cover the estate expenses.  Distributions paid to one of these beneficiaries would be reportable by that beneficiary on that beneficiary's individual tax return and taxable to that beneficiary.

If beneficiaries were designated, the IRA must be split into the respective shares by December 31, 2025 for each beneficiary to use their own age for determining RMDs.

[Steverino78]

I will plan on submitting a 2024 standard 1040 return under my deceased brother's SS#, signing as PR just as I did for his 2023 return.  I should theoretically receive the 1099-R corresponding to his early January 2024 (predeath) $4400 IRA distribution.  I did a dry run through Turbotax, mocking up a 1099.  As this $4400 was his only income and the Single Filer Standard Deduction is $14,600, it appears there will be no tax due.  

The Fidelity IRA was a very recent rollover from my brother's company plan.  As such, he had not yet provided any beneficiaries.  In this light, your description of the IRA-BDA being established for the benefit of the estate appears to match the circumstances.  I will be discussing with the Fidelity specialist to confirm we are all on the same page.  However, Fidelity appears obligated to inform that the customer is responsible for tax implications.  Nevertheless, I'm certain Fidelity will confirm the absence of any beneficiaries.  

All this said, it appears I have the freedom (and obligation) to withdraw IRA-BDA funds to pay remaining Estate/Probate expenses.  I will submit the 1041 using the EIN the IRS has provided at the time the IRA-BDA was created.  Hereto, it seems I should expect to receive a 1099-R for the estate distributions utilized for estate expenses and the closing of the probate.  

The thought has now occurred to me that these Estate BDA withdrawals will be occurring in 1st Q, 2025 and as such, inducing the obligation for a 2025 return. (?)  I'd presume a 1099-R documenting these 2025 withdrawals won't be created until late January 2026.  I was hoping to extricate myself from all aspects at the time the probate is closed (hopefully) this Spring.  Wishful thinking?  

Very grateful for the assistance.

[dmertz]

"The Fidelity IRA was a very recent rollover from my brother's company plan.  As such, he had not yet provided any beneficiaries."

I'm going to guess that the company plan was a SEP plan or a SIMPLE-IRA plan (both are IRA-based plans) that was moved to the IRA-BDA by trustee-to-trustee (Fidelity-to-Fidelity) transfer, not by rollover.  If the company plan was instead a 401(k), 403(b), 457(b) or the federal TSP, the funds would have to have been moved by distribution and rollover and only an individual beneficiary can do that, and the estate would not be involved.  Fidelity's specialist would know this and not permit the funds to be moved to an IRA-BDA if the company plan was not an IRA-based plan.

With the estate being the beneficiary and your brother dying before reaching his required beginning date for RMDs, the IRA-BDA is subject to the 5-year rule for distributions.  This means that no annual RMDs are required and the account must simply be fully drained by the end of 2029.  The estate can assign respective shares of the IRA-BDA out to IRA-BDAs for the beneficiaries of the estate, moved only by trustee-to-trustee transfer, but this does not change the distribution requirement under the 5-year rule.  Each of the separate IRA-BDAs will still be subject to the 5-year rule.  Depending on the amount involved, the beneficiaries might want to spread distributions out over several years rather receiving all of the taxable income in 2029.

[dmertz · Accepted solution]

An estate can use a calendar tax year or a fiscal tax year.  A fiscal tax year is one that ends on the last day of any month other than December.  The estate can even file a return for a short tax year if the end date is less than 12 months after the date of death.  A fiscal-year filing would likely have to be done before the Form 1099-R is issued near the end of January 2026, so you would have to prepare the return just using the transaction information.

Unless the funds are needed by the estate to pay an estate income tax liability (which would be unusual if the income is passed through to estate beneficiaries on Schedules K-1), make sure to have no taxes withheld from an IRA distribution paid to the estate.  Credit for such tax withholding cannot be passed through to estate beneficiaries.

[Steverino78]

Thank you for revealing the options for reporting by fiscal year.  

You had next stated:  "Unless the funds are needed by the estate to pay an estate income tax liability (which would be unusual if the income is passed through to estate beneficiaries on Schedules K-1), make sure to have no taxes withheld from an IRA distribution paid to the estate.  Credit for such tax withholding cannot be passed through to estate beneficiaries."

 I'm still unclear regarding potential pitfalls associated with taking a distribution from the Estate IRA-BDA as the means of liquidating pre-tax funds, (allowing me as PR to pay estate and final probate expenses). 

 Fidelity's process allows me to make the Estate IRA withdrawal via a check mailed to a local bank routing/account associated with the Estate Checking account.  Amidst this transfer option, Fidelity asks me if I want taxes withheld and if so, at what rate. 

I had been inclined to allow taxes to be withheld for the simple reason that in doing so, the taxes would be paid in sync with the income, effectively mitigating penalty as well as the need for a separate Estimated Tax mailing.  These taxes would be paid by the Estate, seemingly rightfully.  I'm not understanding why there would be a concern about any credit needing to be passed through to estate beneficiaries.  To me, the tax induced by the obligatory need to pay estate expenses is a collateral expense of the probate which effectively reduces the inheritance value commensurate to share.  

At this stage of the questioning, in my mind, the paraphrasing of my question is this: 

Should I pay the taxes for the Estate withdrawal now via Fidelity?  If I don't pay taxes now, I will have to set aside the equivelent funds prior to distribution to the beneficiaries, in anticipation of later tax payment.  

Odds are high that I may have misinterpreted something.  Thank you in advance for your patience and perseverance in clearing all of this up.  Extremely helpful. 

[dmertz]

If the income will be used to pay estate expenses and will not be passed through to beneficiaries, the estate will need to pay the income tax on this income (less deductions and exclusion).  You'll want to make sure not to have too much tax withheld, otherwise the estate will have to remain open to receive the tax refund and distribute the refund to estate beneficiaries.

[Steverino78]

I'm working on the 1041 using estimated (anticipated) Line 8 income, which I presume I will be describing as "IRA-BDA Distributions".   

Line 1 asks for Interest income.  As this Estate IRA-BDA has been parked in Fidelity, I have basis (from the day the Trad IRA was converted to BDA) and I can see the closing value on 12/31/24.  The gain will be reported as 2024 interest (from Fidelity's SPAXX MM fund).   

Regarding Income reporting of the Estate IRA-BDA, I would appreciate clarification that I am reporting ONLY income induced by distributions necessary to pay Estate expenses.  I am NOT reporting the value of the ENTIRE IRA-BDA.  

If that assumption is correct, looking forward, after the Estate IRA is distributed to the five beneficiaries, how will these 20% portions become reportable on each beneficiary's 1040? 

Mocking up an easy hypothetical, assuming $500k Estate divided 5 ways into the 5-year rule for distributions, assuming 20% distributed each year:  Each beneficiary will be adding $20k to their existing income via their IRA-BDA withdrawal.  The initial 1099-R documenting the individual beneficiary distribution will reflect $100k gross with $0 taxable... (because it's similar to an in-kind transfer with no tax implications until the beneficiary creates the withdrawal?).  

I've read other posts within this forum in which some are populating 1041 Line 8 with the FULL value of their IRA-BDA.  I don't want to belabor you with articulating all the differences.   Main objecctive at this moment is to verify that, amidst my circumstances (Estate distributions to pay obligatory estate expense) I will ONLY be reporting the distributions as income, not the full value of Estate IRA.

My hat is off to you dmertz, in respect to the depth of your knowledge.  Amidst the depth of these details, I'm now recognizing it may be wise to allow a professional to complete these Estate aspects.  The 1041 doesn't initially appear nearly as challenging as it is evolving to be.  IRS instructions are vague and seemingly presumptive - as if to suggest that if the presumptions aren't known, perhaps I should not be moving forward as DIY on this one.   Meanwhile, I will dig in to learn and absorb more.  

[dmertz]

"I have basis (from the day the Trad IRA was converted to BDA) "

The traditional IRA becoming an inherited (BDA) IRA does not create any basis.  Assuming that your brother had no basis in nondeductible traditional IRA contributions, the entire amount of any distribution from the IRA-BDA is taxable income.

Once the IRA-BDA is split into separate IRA-BDAs for the estate beneficiaries and assigned out of the estate to the corresponding beneficiaries, any distribution will be paid and will be taxable to the beneficiary who obtains the distribution from the IRA-BDA maintained for that beneficiary.  No Form 1099-R can be created for the division of the original IRA-BDA into separate IRA-BDAs because such a division is permitted to be done only by nonreportable trustee-tot-trustee transfer, which is neither a distribution nor a rollover.  An actual distribution from any of the IRA-BDAs is reportable on Form 1099-R, will be taxable, and cannot be returned to any IRA-BDA.

"I've read other posts within this forum in which some are populating 1041 Line 8 with the FULL value of their IRA-BDA."

What gets reported on line 8 of Form 1041 is whatever amount is actually distributed to the estate from the IRA-BDA.  The full value of the IRA-BDA would be reported on line 8 only if the entire IRA-BDA is distributed to the estate.  Of course if that happens, that's the end of IRA-BDAs in this case.

IRAs contain deferred income and any distributions (and only distributions) are Income in Respect of a Decent (IRD).

If you haven't already done so, review IRS Pub 559:

https://www.irs.gov/pub/irs-pdf/p559.pdf

[philsie1]

As I'm close to 3 years into managing my father's estate I want to offer some thoughts. IRAs, 401k's, and some other such accounts (inc life insurance) where no living beneficiary was identified still fall outside of probate. This may depend on which state you're in but so far in the two states I'm probated in, retirement accounts are transferred directly to the heirs.  The distinction is that, not being part of the estate, they are protected from creditors.

Thus, if the only money your brother has was in retirement accounts and debt claims were filed against the estate, those funds would not be claimable by the debtors.  Each company that manages retirement accounts does things their own way, but they all seem to have a process for heirs to claim these funds.

Also, not being part of the probate estate, they can be distributed immediately.  Good luck, sorry for your loss.  Going forward, everyone should get at least some of their affairs in order. set beneficiaries, make accounts TOD (transfer on death), even if you don't have the gumption to write a Will.

[dmertz]

Almost all IRA agreements make the default beneficiary the estate of the decedent.  Similarly, 401(k) agreements usually make the estate of the decedent the default beneficiary, except when there is a surviving spouse and the 401(k) is subject to ERISA which makes the surviving spouse the default beneficiary unless the surviving spouse previously waived that right.  If the estate is the beneficiary, it's subject to probate.

Creditor protection is generally provided to the retirement account participants, not to beneficiaries.