Estate Income tax return with IRA income of the deceased

[Greta]

Client (the executor) will have deceased father's 1099-R (of nearly 1 mil.). Father had no named beneficiary (since his beneficiary wife predeceased him), and no will, so the IRAs will be payable to the estate. There are 3 sons. If they are deemed to be the only legal heirs, can I do the 2022 tax return with three K-1's as distributions, or must the estate pay the tax at its high bracket.

[BobKamman]

As long as the distributions are done in the same tax year, they will flow through to the beneficiaries on K-1s and the estate will not owe any tax.  But that amount might put the kids in high brackets also.  I am working on a similar case and trying to find a way to get the money into inherited IRA's -- not ready yet to say it can't be done.  

[Accountant-Man]

But you have to terminate the estate to get the income passed through entirely to the beneficiaries.

[Accountant-Man]

Turning IRA into inherited IRA's -- good luck with that. I vote that you can't.

[sjrcpa]

I disagree. If the estate has X income and distributes X income in the same year, it flows to the beneficiaries on K-1s, whether or not the estate is terminated.

[joshuabarksatlcs]

Never dealt with this or researched this.

What if the estate disclaimed?  Perhaps too late now.  Possible under the governing state law?

[Greta]

My question is - without a will, and without beneficiaries named on the IRA - will it likely take more than the year to determine who the legal recipients of the estate funds are so as to distribute via K-1s. Certainly the sons will be in lower brackets than the estate. I don't know the legal procedure in NY to determine heirs. This is my second instance this year of a large inheritance so poorly planned. Somebody at the brokerage dropped the ball (as well as the elderly parent). I suppose they had no way of knowing that the original beneficiary (the wife) had died.

[sjrcpa]

I don't know either.

Was the original beneficiary/wife the mother of his 3 sons? 

[Greta]

Yes, mom of 3 sons was the original beneficiary of the IRA. Husband messed up that he did not have a contingent beneficiary and did not replace her, esp in such a big account.  I think we should remind our clients to put a beneficiary with every financial account. It would be a good service to them.

[joshuabarksatlcs]

To me, getting the facts wouldn't solve the problem.  Neither would dwelling on what should have done or could have done.

To me, at this point, it is NOT YET ready to discuss the tax issues.  If I were in your boat, I would advise the sons to get competent legal advice, from an attorney specialized in estate and trust for the state (you said NY?)

Issues would include:

probate needed?

Disclaimer possible?

The options for the inheritance and distributions? 

Once the family obtain the legal opinion on the options, analyze the tax angles for each.

If there's only ONE option, still analyze the possible tax angles.

I imagine the legality involved could be different from state to state.

[BobKamman]

But remind clients first to make sure there's money outside of beneficiary designations to pay for funeral, final medical expenses, debts, mortgages, and final tax return including preparer fees.  You want to see a mess?  Think of a family of five kids where they only asset is an IRA and they are all named as beneficiaries so they collect directly.  (And show me a family of five kids where they all get along.)  

I have advised an occasional client to remove beneficiaries from an IRA, because that's where all their money is, and allow the funds to go to the estate, because it will need it to pay the bills.  

[btax2]

Are you certain that it is not first taxable to the estate and subject to the estate's tax rates and not the beneficiaries?

[Greta]

I wish I knew if there is a way to pass the taxable money through a K-1, but if there is no will and no beneficiary to the IRA, then how does one determine who the recipients are and do it within the same year. This seems to be happening to my clients, and the tax monies are enormous. But I don't see a way out. I now mention this to my elderly clients to make sure they have their affairs in good order.

[btax2]

My question relates to a probate estate where the sole beneficiary was named in the will would receive the entire retirement distribution. It would seem extremely unfair to pay estate tax rates on a large distribution that was intended to benefit the individual and the distribution was passed on to her within the same fiscal year. Mandatory income taxes withheld are woefully short at estate tax rates.

[Greta]

The IRA must have a beneficiary named, otherwise it goes into the estate and loses  the benefit of stretching out an inherited IRA over 10 yrs for the beneficiary, and instead pays at the exorbitant estate rates. I am not an expert on estate planning, but I've seen brokers who sold the IRA to his client neglecting to get a beneficiary named. It's a huge mistake and I don't know of a solution after the fact.

[qbteachmt]

You didn't state if there was already an action taken that will result in a 1099-R being issued, or it will be taken? If it already happened, was that for distribution to the estate? In that case, it would be too late, but for reference for future actions, have you searched the web? Make sure to see the article dates are after the enactment of the 2019 SECURE Act. Examples:

https://www.wealthmanagement.com/estate-planning/ira-goes-estate-inherited-iras-individual-beneficia...

which refers to a 2003 ruling, as explained here:

https://www.fiscalwisdom.com/resources/retirement/ira/ira-distribution-planning/ira-rules-you-must-k...

https://www.bankrate.com/retirement/inherited-ira-rules/

In general, when the issue is inherited IRA to an estate or inheritance from the IRA to the Estate, there are rulings that explain there is no need to keep the estate open for that full time period to comply with the IRA distribution rules (whether under the old rules or the new rules), because the IRS has ruled there is the ability to set up inherited IRAs for the beneficiaries of the Estate and then there would be a direct (trustee-to-trustee) transfer. The rollover provisions don't apply. That's why it matters now which type of activity you have an 1099-R from. If the estate is the default by virtue of no named beneficiary or the explicit beneficiary, the estate would have the trustee do transfers to accounts in the name of each beneficiary FBO.

(edited to act as reference for future actions, if it is too late to make a decision)

[BobKamman]

@Accountant-Man  After reading through Pub 590-B, I vote that sometimes it can be done, depending on the facts and circumstances.  

[BobKamman]

She didn't state there is already a 1099-R.  She's planning for 2022 and if the payment is made this year to the estate, that is what will be issued to it.  And then if the funds are distributed to the estate beneficiaries this year, they will receive Schedules K-1 and pay tax on their share.  In most states (those with the Uniform Probate Code, or something similar) it's allowed -- even encouraged -- to make partial distributions while the estate is still open.  But maybe this case comes from New York, California or some other backwards state.  (Ever notice how the most liberal states are often the most conservative when it comes to protecting probate-lawyer fees?)

One thing I came across while researching this for a client in the same situation is that some IRA trustees have default provisions in their agreements, that designate the spouse or children as beneficiaries in the absence of a beneficiary designation.  So the starting point should be to look at that.  This is pointed out in a reliable article at

https://www.irahelp.com/slottreport/there-no-beneficiary-retirement-account-now-what

[qbteachmt · Accepted solution]

"She didn't state there is already a 1099-R."

That means an activity will be done in 2022.

"and if the payment is made this year to the estate"

There is nothing that describes if there is a Distribution or not. She told us:

"will have deceased father's 1099-R"

Which means they know there is or will be an activity that will result in a 1099-R. That's what I replied to. I will edit my reply to describe that it isn't clear if there is already an action taken, or not.

The IRS has stated in more than one ruling that when the Estate is the IRA beneficiary (by default or as stated), there is the ability to treat it as an Inherited IRA (with some restrictions), and you are not forced to completely cash it out just because it is "to" the estate. Creating transfers to inherited IRAs for the Estate beneficiaries is permitted.

[BobKamman]

@qbteachmt "The IRS has stated in more than one ruling"

You're so good at posting links, how about just one?

[qbteachmt]

"You're so good at posting links, how about just one?"

Bob, are you reading the replies I already provided? How about the one reply with three links? Did you follow them and read them?

[BobKamman]

You posted to ignore things from before 2019, and then you posted to look at something from 2003.  Which is it?

[qbteachmt]

I posted a link to an article that is current, and it refers to a ruling that still applies, so I posted a link to that info, along with a current topic that refers to a recent ruling that was the same.

"You posted to ignore things from before 2019"

That's not how I stated it. "Make sure to see the article dates are after the enactment of the 2019 SECURE Act."

Old stuff might still apply, but you have to read it to know and in the case of my links, they take you there from current articles.

[RichCifelli]

Good luck with trying to transfer inherited IRA to beneficiaries from estate acct without getting a private letter ruling