Reporting an inherited IRA with a K-1 (1041)?

[gwmerritt11]

I inherited an IRA from my deceased father. I understand that I need to complete a K-1 (form 1041) to report the inheritance? Is that right? I emptied the IRA as a lump sum to avoid any penalty. Should I also receive a 1099R for reporting?

[VolvoGirl]

You will get a 1099R for the IRA from the plan.  You get a 1041 K-1 from the Estate/Trust.   Are you the one that needs to prepare the 1041 estate return?  

[gwmerritt11]

Thank you for the quick response, @VolvoGirl !  Yes, I am the executor for the estate. My 2 brothers also received equal percentages (i.e., 33%) of the IRA funds.

[VolvoGirl]

We better ask @dmertz 

[dmertz]

Was the estate the beneficiary of the IRA or instead were you and your brothers the designated beneficiaries on the IRA account?  (The fact that you were able to empty the IRA suggests that the estate was the beneficiary, but I want to make sure that that was the case since you also said "I" inherited an IRA, which is inconsistent with a distribution to the estate.)

If the estate was the beneficiary, did you have agreement from the heirs of the estate for the estate to receive a distribution of the entire inherited IRA?

[gwmerritt11]

Thank you, @dmertz , for your reply.  Neither I nor my brothers were beneficiaries of the IRA.  So I guess, in answer to your question, the estate was the beneficiary. Also, my brothers and I were the sole heirs of the estate (although there was no will that identified that -- our mother had already passed away, so we were the sole heirs of the entire estate).

[dmertz]

Since the distribution was payable to the estate (by default), the estate (or you as executor of the estate) receives the Form 1099-R, with the taxable amount (usually the entire amount) reportable on the estate's income tax return, Form 1041 line 8, Other income.  This Distributable Net Income distributed to the beneficiaries of the estate is passed through to the beneficiaries in box 5 of a Schedule K-1 (Form 1041) issued to each of the beneficiaries for inclusion as income on the beneficiaries' individual tax returns.  The estate will get a deduction for the DNI on Form 1041 line 18 so the estate will not get taxed on the DNI.

Note that you did not receive a distribution from the IRA, the estate received the distribution from the IRA.  You and your brothers are receiving distributions from the estate.  The money you and your brothers receive is simply ordinary income.  With respect to you and your brothers, the income retains no characteristics of having originated from an IRA and will be reported on Schedule E of your individual tax returns.

[gwmerritt11]

That's very helpful, @dmertz ! I think that answers what I needed perfectly.  Thank you so much!

[skidude]

Every situation is different, so there is no one rule that applies to all situations. My understanding is there is federal law that states IRAs with no named beneficiaries, no surviving spouse, but surviving children then the children are the beneficiaries and may control their IRA distribution instead of the Estate. Also,, financial institution has there own rules that apply, so you'll need to check with them to verify the IRA owner contract signed by the decedent. Here's a helpful No Beneficiary Named by IRA Owner 

[dmertz]

"My understanding is there is federal law that states IRAs with no named beneficiaries, no surviving spouse, but surviving children then the children are the beneficiaries and may control their IRA distribution instead of the Estate."

There is no such federal law.  In the absence of anything in the IRA agreement stating a default beneficiary other than the estate, the estate is beneficiary, even when there are surviving children or a surviving spouse.

[Schmidlap]

What is the treatment on K1 if the beneficiary chooses to roll their portion of the distribution into an inherited IRA?  I know this is an option, and can defer withdrawal (income to the beneficiary) over 5 years in this case. How do I (the executor) report to the beneficiary the amount available to roll over and therefore exclude from income on their 1040?

[dmertz]

A 401(k) with a designated beneficiary has nothing to do with the estate (other than being part of the gross estate for potential estate tax purposes on Form 706).  Nothing about such a 401(k) goes on an estate Form 1041; with a designated beneficiary there can be no reportable income to the estate from the 401(k).

@Schmidlap  , in your case I assume that the decedent died after 2019.  With there being a designated beneficiary of the 401(k), the 5-year rule is not an option.  Non-Eligible  Designated Beneficiaries would be subject to the 10-year rule (with annual RMDs if the decedent died after their Required Beginning Date for RMDs and Eligible Designated Beneficiaries would be subject to  annual beneficiary life-expectancy RMDs (with the option to use the 10-year rule if the decedent died before their RBD).

If instead the estate was the beneficiary due to there being no designated beneficiary on the 401(k), no rollover to an inherited IRA is permitted.  In this case, distributions can only made to the estate with the estate reporting the income on Form 1041, passing the taxable income through to the estate beneficiaries on Schedule K-1 for the income to be included on the beneficiaries' tax returns and the estate taking a deduction for Distributable Net Income.

[Schmidlap]

Thanks for the reply @dmertz .  I should have emphasized this situation was similar to the original thread, i.e. the IRA passed to the estate as there were no designated beneficiaries and no will, this year.
If you are correct on this, it is of course very unfortunate that there would be no option to spread out the income.  It conflicts with other information on this, stating that a custodian-to-custodian transfer into an inherited IRA is allowed, referencing ruling PLR 202031007  and also 201241017.  (Don’t understand that redaction!).  Dates to July 31 of 2020.
I also know that my mother’s IRA passed to a trust, and I was able to get that rolled into an inherited IRA, but possibly there is something special about trust versus an estate.

In any case, do you have a reference document I can refer to that concludes that this is not allowed? 
As for my original question, I’m thinking the answer is that a trustee-to trustee transfer of an IRA is not reportable and would not show in the income on 1041 as there would be no 1099-R to the estate.

thanks!

[dmertz]

Only a designated beneficiary is permitted to roll an inherited IRA over to an inherited IRA (traditional or Roth).  Only an individual can be a designated beneficiary (§ 401(a)(9)(E)(i)) and the estate of the decedent is not an individual, so the estate is not a designated beneficiary (§ 1.401(a)(9)-8 Q&A-11).

Section 402(c)(11)(B) allows a trust to be treated as a designated beneficiary under certain circumstances, but an estate is not a trust.  Also, a 401(k) is not an IRA.  An IRA is allowed to be trustee-to-trustee transferred to an inherited IRA for the benefit of an estate or a trust because such a transfer is not a distribution or rollover.  An inherited 401(k) is permitted to be moved to an inherited IRA only by distribution and rollover.

The forum algorithm blocked the PLR numbers for some reason so you might try posting them again in a different format, perhaps as URLs.  However, I'm sure that they do not allow for a rollover to an inherited IRA under these circumstances.  Perhaps they are referring to the transfer of IRAs, not to distributions from a 401(k).

[bartostm]

I and my siblings are in a situation very similar to this thread.  My brother died with a 401K but no named beneficiaries and no will.  So we have been moving through probate.  We were dealing with a financial services firm who dragged their feet, including denying the account existed.  Now all of a sudden they informed the executor that the 401K was lump summed out, 10% withheld (presumably to the EIN) and “the check for the balance is in the mail”.  Since for tax reasons we would like to shift the tax burden to the three beneficiaries via issuing K-1s, we were wondering if now we have to stretch this over two years, the bulk distributed now and the remaining 10% in the following year after the 1041 is filed and the withholding recovered.  Also, even though the 401K was lump summed out, with the check going to the executor’s estate account, can distribution of the funds be deferred so that the taxable event to the beneficiaries occurs in 2024 rather than 2023?