IRA made payable to estate
I have a client whose aunt passed away in Oct 2010. She had a $58k ira with no designated beneficiary. My client, the executor of the estate, received the proceeds of the ira into the estate. The estate has not yet been closed and no funds have been distributed to the beneficiaries of the estate. Who is responsible for payment of taxes on the ira distribution — the estate or the beneficiaries of the estate? Can the income be passed through to the beneficiaries of the estate on a K1 and paid by the beneficiaries on their personal taxes?
Thanks for your help.
Permalink Submitted by Alan Spross on Wed, 2011-03-23 22:37
Basically, yes.
It may not have been a wise move to request an IRA distribution to the estate unless the estate beneficiaries wanted the money ASAP. He could have closed the estate and had the IRA assigned to the estate beneficiaries and they might have been able to stretch out the distributions. Worst case would be only 5 years if the aunt passed prior to her required beginning date, but now the taxes will be based on the lump sum distribution.
While the estate will have to report the IRA distribution in estate income, the IRA income and therefore the tax liability from the 1041 can be passed through to the beneficiaries on a K1 and they will report the income on their own returns.
Permalink Submitted by Dorothy Zaharako on Mon, 2018-09-24 13:23
is it true that the IRA income and the tax liability can be passed through only if the proceeds are distributed in the same year the proceeds were received by the estate? If so then the estate can delay the payment to the next year and the estate pays the tax in year of receipt?
Permalink Submitted by David Mertz on Mon, 2018-09-24 16:27
The estate can elect under section 663(b) to treat distributions made within 65 days following the close of the estate tax year as distributions made on the last day of the estate’s income tax year. For distributions made beyond that, distributions not required to be made during the estate tax year would be treated as hiving been made in a subsequent estate tax year. Distributions required to be made during the estate tax year are treated as made during the tax year no matter when they are made. Whether distributions are optional or required is a matter of state law and the terms of the governing instrument (the will in the case of an estate). I suggest getting an estate attorney to help you determine the best course of action. In a majority of situations it’s not be beneficial to have the estate pay the taxes since the estate income tax rates are usually higher, reaching the highest bracket at only $12,500 of taxable income.
Permalink Submitted by mk foss on Wed, 2011-03-23 23:53
The executor will want to elect a fiscal year for the estate. The tax year will start with the date of death and go to as late as September 30, 2011. Even if the funds were received by the estate in 2010, they can be paid to the beneficiaries before the first year end of the estate and push the tax burden to them. It’s always better to have the beneficiaries pay tax on IRA distributions than to retain them and have the estate pay the tax becuase the income tax rates are higher for estates (actually the brackets are compressed).