IRA Distribution to Individual Heir & Multiple Charities

Submitted by Mary M on Wed, 2020-01-29 02:20

Hello-
My aunt recently passed away in 2020 and left a number of IRA accounts with a beneficiary as her “estate”. The heirs in the will are a mix of charities and one heir, myself, with % distributions. The executor, who is also her attorney and CPA is concerned about the tax consequences, and has requested that I obtain a letter from a professional tax or estate attorney stating exactly how the IRA assets need to be liquidated and titled to myself. From everything I have read to date, this seems to be fairly straightforward so I am confused as to why he is requesting this. Is there some magic that needs to happen to ensure that the current institutional holder of the IRA accounts titles the distribution of the assets properly as they pass to the estate? I would have thought that this is something he as her advisor and executor would know how to do. Any advice on how to proceed and / or questions I should ask would be helpful. Two of the accounts are titled IRA FBO, and one account is a 503b account.
Thank you so much in advance.



Submitted by Alan - IRA critic on Wed, 2020-01-29 03:52

  • I assume the 503b is a 403b. For that account, the plan will only issue a lump sum distribution to the estate.
  • The inherited IRA is just another asset of the estate, and the executor needs to follow the instructions in the will, if any. If the will is silent the executor can either have the IRA distributed into the estate or assign the IRA to the beneficiaries of the estate. While the charities do not care since they will not owe taxes, that leaves you as the only one to benefit from receiving your share of the IRA to prevent you from having to pay taxes in a single year. I will guess that aunt passed after RBDs had begun, therefore you could stretch an inherited IRA only for her remaining single life expectancy, but that’s still better than a lump sum distribution through the estate.
  • While you are only beneficiary for which it matters, if the executor assigns the IRA to all the beneficiaries including the charities, he will not have to report income to the estate (at least from the IRA) and deal with a charitable deduction for the estate. It will make his 1041 much easier, possibly even eliminate it.
  • All large IRA custodians will accept such a request from the executor, but there are still a few minor ones that resist. If he runs into this, the inherited IRA could be first transferred to a new IRA custodian, preferably a major firm. Otherwise, if the IRA custodian refuses assignment and a distribution from the IRA is made to the estate, you will lose your limited stretch since the executor will pass your share of the IRA distribution through the estate to you on a K 1 form, all taxable in the year distributed.  Again, the charities are not likely to care as they are getting their inheritance tax free, so actually prefer a lump sum.
  • The executor should be able to confirm this info with any professional fiduciary if needed. Again, if the will is specific on any of this, which I doubt, the executor must adhere to the will provisions.


Submitted by Bob on Thu, 2020-01-30 23:15

Could the Executor transfer the right to receive the 403b held by the Estate to the charitable beneficiaries to avoid it dropping into estate?



Submitted by Alan - IRA critic on Fri, 2020-01-31 00:31

That could be done except that the 403b plan may refuse to accept the assignment.



Submitted by Mary M on Sat, 2020-02-01 17:41

Thank you so much for the answers.  The executor said he will be sending the IRA forms for me to look at but is insisting on a letter from a professional stating how the distribution of funds to me as the sole heir should flow.  I am assuming he’s doing this so as not to appear in conflict as an “advisor” to me personnally while maintaining his fiduciary responsibility to the estate.  I guess this would be a letter from a CPA? that has more specialty in tax planning for estates.  The above comments on the 403b was also in line with my thinking.   I don’t know if inheriting the 403b is subject to both inheritence tax and some type of RMD schedule.   The 403b plan is currently maintained by a large institution so I am hopeful they would agree to the split.



Submitted by Alan - IRA critic on Sat, 2020-02-01 19:48

  • It is hard to imagine any advisor allowing a client to leave their employer plan to their estate, as that almost always results in lump sum distributions to the estate. Leaving IRAs to the estate is also a poor decision, but not quite as bad since IRAs can generally be assigned to estate beneficiaries who can then determine individually the amounts and year of the distributions over the much shorter period of time that estate beneficiaries have to drain the accounts. A common serious executor error is allowing lump sum distributions to be made to the estate, but in this case the charities inherit tax free, so you are the only one that will have a major tax impact from distributions of these accounts that are not stretched over a period of time. 
  • Note that having left these plans to her estate, the Secure Act did not change the stretch period for estate beneficiaries.  However, if aunt passed prior to her RMD beginning date, you will have to drain your share of an inherited IRA in 5 years. If she passed after her RMD beginning date, you will have her remaining life expectancy which depends on the age should would have attained at year end of the year she passed. Either of these options is far less time than you would have had if she named you as beneficiary instead of her estate.  However, the 5 years or somewhat longer period is still much better than a lump sum distribution that will increase your tax bill for the distribution unless you inherit a small amount. 
  • Following is a link to a sample letter for executor to send to the IRA custodians from noted retirement plans expert Natalie Choate. This is the only critical decision with respect to you. Whether the executor wants the IRAs likewise assigned to the charities for their respective portions does not affect you, it just affects the execution of the executor’s duties and required estate tax filings etc.
  • https://www.coloradoestateplanning.com/design/images/Nancy-Choate-Sample-Letter.pdf
  • This advisor should know how to get referrals to professional executors in the area that can confirm the benefit of assigning the IRA, at least your portion of it if not the charities also. They only need to know if you want to stretch the IRA for the limited number of years, or have it entirely distributed to the estate, in which case you will get a K 1 making your distribution fully taxable in a single year.
  • Is it possible that the executor knows this, but wants to extend the estate settlement time? 
  • If you can provide the age of aunt on DOD and the DOD itself, I can tell you how long your stretch period will be. 


Submitted by Mary M on Fri, 2020-02-07 00:15

Some comments on aunts death –  she passed early Jan 2020 and was 79. She had taken her 2019 RMD in late dec on all of the accounts. I am concerned that the executor, also her past attorney/cpa didn’t insist on her setting up the beneficiaries properly but at some point the custodians/financial institution said some beneficiary was better than none I supose.  I will look over the link to the letter you provided.  I hope he’s willing to take the necessary steps otherwise I don’t know what recourse I’ll have through probate. 



Submitted by Alan - IRA critic on Fri, 2020-02-07 03:00

Do you happen to know the value of all estate assets?  In other words, are there enough other assets in the estate to pay final bills and taxes of the estate, or will the plan assets be needed to do that?  Executors have problems settling estates if there will not be enough assets that can be converted to cash in the estate to pay all expenses, not incidentally including executor fees.  Therefore, leaving the plans to the estate may have been intentional, not an oversight. And if that’s the case, a request for assignment may not come or if it does, not until the estate is ready to close. 



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