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

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?  

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.

We better ask @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?

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).

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.

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

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 

"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.

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?

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.

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!

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).

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?

Yes, the estate will need to remain open to receive the tax refund and distribute that to the estate beneficiaries.

The executor/personal representative should have been able to request that no taxes be withheld to avoid having to deal with tax withholding that cannot be credited to the beneficiaries on Schedules K-1, but it's almost certainly too late to do anything about that now since the plan has made the distribution and has withheld the default 10% in the absence of any instruction not to withhold taxes.

Depending on the timing of estate income and whether or not the estate's tax year has already been established by filing the estate's first Form 1041, the estate could potentially use a fiscal year to cause this income to appear on a Form 1041 for its tax year ending in 2024.

Thanks for the response.  That was helpful.

One follow up question.  If we pick an example with numbers, say the total estate was $100000 and thus the amount withheld was $10000.  To have the estate pay no taxes, we would need to push $100000 to the beneficiaries so they can file.  Also, the K-1s would sum to $100000 and provide the deduction on the 1041 needed to zero out the lump sum.  But there is only $90000 available to distribute since the IRS has $10000.  Does that mean in this case all $100000 can’t be distributed to the beneficiaries?  Or does the estate borrow the $10000 so that $100000 is distributed?

I haven't encountered the situation myself, but the instructions for line 9 of Schedule B (Form 1041) say regarding tier 1 distributions:

Line 9 is to be completed by all simple trusts as well as complex trusts and decedents’ estates that are required to distribute income currently, whether it is distributed or not. The determination of whether trust income is required to be distributed currently depends on the terms of the governing instrument and the applicable local law.

So if the income is required to be distributed currently, it becomes part of the DNI deduction whether distributed or not.

Thank you again for the information!

One further thought on this topic.  I have seen in this post string that the estate can bear all of the tax burden and also that the beneficiaries bear all the tax burden, but does the IRS allow for a split of the tax burden?  My rationale is that estates don't file state income taxes but individual beneficiaries do.  I live in a state where the tax rate is a flat 4%.  So if the upper tax bracket is both 37% for individuals and for estates, then the marginal tax bracket for individuals is really 39% (35+4).  Thus, it seems there is a sweet spot whereby if the estate is large enough, if you reduce the size of the estate distribution so that you fall into the 32% individual tax bracket (32 + 4 =36% effective tax bracket), you will be at that "sweet spot" and any excess potential distribution can be retained by the estate and taxed there.

Each state has requirements for filing estate income tax returns.  There might be a scenario where the estate's state tax liability if the income is retained could be lower than estate beneficiary's income tax liability on the same amount in a different state if the income is distributed.

dmertz, I know this is an old topic but I have a similar situation. If after the IRA money is distributed to the Trust and passed thru to the beneficiaries, how many years does the trust have to do this? I am trying to minimize taxes to the beneficiaries so that they won’t get walloped with a high tax bill.

The terms of the trust and providing the trust document to the IRA custodian will determine whether the trust is qualified for look-through for determining required minimum distributions.  The terms of the trust will also determine how income is to be distributed to be distributed to beneficiaries.  How long the IRA can remain depends on the RMD requirements.

If the entire IRA has already been distributed to the trust, passing the income through to beneficiaries as distributable net income will allow the income to be taxed at the individual's tax rates rather than the generally higher trust tax rates.  Once received by the trust, the income must be taxable on the trust's income tax return for that trust year unless passed through to trust beneficiaries for taxation on the individual's tax return for the year that contains the end date of that particular trust income tax year.

dmertz, thanks!. It seems to me because of the IRS Secure Act, pass through distributions to Beneficiaries must be made within 10 years or distributions from the IRA which aren’t distributed will remain in the Trust and be taxed at the much higher Trust tax rate.

I found this on the internet about the IRS Secure Act:

”Pulling Back on the Stretch IRA

Just as there are rules about RMDs during the IRA owner’s life, there also are rules about distributions from an inherited IRA after the owner dies. Historically, the preferred payout for an inherited IRA has been the “stretch IRA,” where the post-death RMDs are stretched out over the life expectancy of the new IRA beneficiary. This allows the IRA assets to continue to grow tax deferred, often for many years after the owner’s death. The SECURE Act, passed in December of 2019, the SECURE Act 2.0 of 2022, and subsequent Treasury guidance3, have significantly reduced the ability to create a “stretch IRA.” For most individual beneficiaries, IRAs inherited after 2019 are subject to a 10-year rule that requires the IRA to be completely distributed by December 31 of the tenth year following the year of the IRA owner’s death. The 10-year rule may or may not include RMDs during the ten years, depending on whether the deceased IRA owner had reached their RBD at their death.Non-individual beneficiaries such as an estate, charity or certain trusts, are usually subject to either a 5-year rule, which requires distribution of the entire IRA by December 31 of the fifth year following the IRA owner’s death, or the “ghost life expectancy” rule, in which RMDs are spread out over the deceased account owner’s remaining single life expectancy. In such cases, the 5-year rule applies where the account owner died prior to their RBD, and the “ghost life expectancy rule” applies where the account owner died after their RBD and therefore had been subject to RMDs.

Certain beneficiaries, known as “eligible designated beneficiaries” or EDBs, are not subject to the new 10-year limitation. EDBs include: the IRA owner’s surviving spouse, the owner’s children while they are under age 21, certain individuals who are chronically ill or disabled as of the date of IRA owner’s death, and any person who is not more than 10 years younger than the IRA owner. EDBs can generally still enjoy the benefits of a stretch IRA by taking RMDs over a period that could be as long as their lifetime.”