1099-R issued to an Estate

[johcha]

My father had an Prudential annuity with his second wife (not our mother) as the sole beneficiary of the annuity, who predeceased him.  Therefore it must go to his estate before it can go to the beneficiaries named in his will (my sister and me).  I went through the process of setting up a new tax entity "The Estate of **** ****", a new bank account and have started the probate process with the applicable county court.  I am also the personal representative of the estate and executor of his will.  Prudential says that the new estate entity will be the beneficiary of the annuity and they must transfer it in a lump sum to tha new estate bank account.  They will also provide a 1099-R to the estate for that lump sum transaction.  It should show approximately $266K gross distribution (box 1) and $48K taxable amount (box 2a).  Prudential said that I could choose to have state and federal taxes withheld prior to the distribution, which would also show on the 1099-R. 

Can I have the estate pay the state and federal taxes (via withholding or paying it via the estate tax return) and therefore, have the distribution of the estate be completely tax free to my sister and me since the taxes have been paid on the?  Are there alternative ways? 

[Critter-3]

Can I have the estate pay the state and federal taxes (via withholding or paying it via the estate tax return) and therefore, have the distribution of the estate be completely tax free to my sister and me since the taxes have been paid on the?   Yes you can IF you want the distribution taxed at the estate tax level with is very high.  I highly recommend you seek local professional assistance to see how much taxes will be paid at the estate level or the personal level and then make your decision.  

[Anonymous_]

I agree with @Critter-3; consult a local tax professional. 

Further, it is typically more advantageous to have the income passed through to the beneficiaries due to the highly compressed tax bracket of estates and trusts.

[johcha]

Thank you both.  I understand that the estate tax rates are considerably higher than both my sister's and my marginal tax rates, but given the circumces, is there a way to pass it through to both my sister and me?  

[Anonymous_]

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@johcha wrote:

.....is there a way to pass it through to both my sister and me?  

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Yes, you simply distribute the entire taxable amount to yourself and your sister on K-1s.

[johcha]

Thank you all!

[dmertz]

Tax withholding cannot be passed through to estate beneficiaries, so if you expect to pass the $48k through to estate beneficiaries on Schedule's K-1, you should generally decline tax withholding.  If taxes are withheld and the Form 1041 shows a refund, the refund will have to be paid to the estate and later distributed from the estate to the estate beneficiaries, potentially delaying the closing of the estate.

[johcha]

Excellent advice. 

Thank you!