“Normal” IRA distributions after IRA owner’s death
I was recently brought in to advise on an estate matter and do not know how this part of the estate is to be handled. Decedent died in May 2007, naming his estate as the beneficiary of his IRA ($275K). Will specified that IRA is to be put into a trust with “income paid to wife during life and remaining principal and unexpended income to his 2 children (from prior marriage) on wife’s death. To this day the IRA (minus $26K distributed as “normal distributions” after his death) remains with the IRA custodian. Here’s the story on the $26K: Prior to his death, IRA was distributing $2,000/mo into the checking account decedent held with his wife. After husband’s death, that didn’t change. Distributions continued until June ’08. In April ’08, accountant filed decedent husband’s final inc tax return (joint with wife), including the $13K paid out in ’07 as ordinary income to wife, based on the 1099 issued in husband’s name & SSN. Wife did advise the IRA custodian of the death and did send along the the death certificate. Wife died in May ’08 and one distribution was made in June ’08. When estate bank account was set up, that $2,000 was among the funds moved to the estate bank account. Wife’s final return, filed Apr. ’09, again reported the entire $12K distributed from the IRA in ’08 as ordinary income.
[u]Basic Questions[/u]:
Estate has taken no direct distribution as yet. Were each of these actions correct/incorrect, and if incorrect, how do we fix them?
–Direct payments to wife during her life, using SSN of husband, even though named beneficiary is estate.
–Reporting those payments as income to her on their joint return.
–Receiving the June ’08 distribution into the checking account received by 2 decedents.
–Reporting the June distribution (after both husband and wife had died) as income to the wife on her final inc tax return.
[u]Other questions[/u]:
–Did estate have a RMD obligation for 2008? If it did, would the $12,000 distributed to checking shared by both decedents count toward that at all?
–Should any of the distributions made in ’07 or ’08 be considered income to either estate (prompting the need to file a 1041?
–When we finally sort this out, IF the testamentary trust is valid, will the funds have to pass through the estate and into a trust before distribution to the two beneficiaries (using their father’s life expectancy)?
–What other problems am I missing?
Thanks
Gen
Permalink Submitted by Alan Spross on Tue, 2009-07-07 21:42
Lots of problems here caused by poor planning and bad execution after the fact.
The IRA custodian must not have been notified of the death for months, or those distributions would never have been reported under decedent’s SSN. When was the testamentary trust set up with it’s own EIN? Did husband pass prior to or after his RBD?
The incorrect 1099R forms could have been corrected by nominee procedures to the correct EIN. How does the trust define “income” with respect to the IRA?
The IRA beneficiary here is a non individual since the trust was apparently not shown on the beneficiary designation for the IRA. The 5 year rule applies if husband passed prior to RBD. Once the trust is established, the IRA should be assigned from the estate to the trust. Perhaps the estate could have been bypassed if the trust was established prior to distributions being made, but it sounds like it was not.
Permalink Submitted by Genevieve Bishop on Tue, 2009-07-07 22:45
You are making me feel better because you are confirming my gut.
Husband died after his RBD. Trust is very loosely (I’m being kind) drafted and does not define income. All I know for certain is that there IS an EIN for the estate. I do not believe the trust has one.
Thanks!
Permalink Submitted by Bruce Steiner on Tue, 2009-07-07 22:49
With all these questions, I suggest you bring in co-counsel (preferably someone other than the one who prepared the Will) who can assist you on this.
The wife (or her estate) is entitled to the income earned within the IRA, and the children are entitled to the balance. If the wife’s estate goes to someone other than the husband’s children, you’ll have to sort out who gets how much.
Since the IRA owner had reached his required beginning date, you’ll be able to stretch the IRA out over his life expectancy (as if he hadn’t died).
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Genevieve Bishop on Tue, 2009-07-07 22:54
Bruce,
Can I contact you off line about this?
Best,
Gen