46 thoughts on “IRA TAX PLANNING – TRUST OR ESTATE AS BENEFICIARY

  1. Thanks, interesting and viofrmatine.I am considering to leave IRA to trust to support my spouse if she survives me and then give it to my daughter. I am not too concerned about distribution rate as long as MRD is not more than the support for my wife.

  2. My situation is that the estate is the ‘default’ beneficiary. We were initially led to believe that the custodian would cooperate and substitute myself and the other ‘beny’ for the estate since we are designated in the will. Then they change their mind or we got a different rep. Now, they just want to distribute on the life exp. (17 years!) They had the ‘gall’ to say it was an accounting problem.
    So what is the ‘trick’ to get them to cooperate?

  3. In your article on IRA TAx Planning-Trust or Estate as Beneficiary. you cite PLR 2005-2004. I was unable to find that Ruling. Can you confirm the number or what the result was in the case. Thanks.

    • The cite in the article is correct. You left out a zero in the citation you are using for your search.

  4. If a trust is the beneficiary of the IRA, and the RMD (or more) is paid annually to a beneficiary of the trust, does the trust pay the taxes or does the individual receiving the RMD pay the taxes?

    • The beneficiary pays the taxes. In general, distributions by a trust “carry out” the income of the trust (known as “distributable net income,” or “DNI”) to the beneficiaries. Thus, so long as distributions equal or exceed the trust’s income, no tax is paid by the trust. Distributions of principal usually do not carry out DNI; however, the Internal Revenue Code includes IRA distributions in DNI.

      • Could you cite the code section for your last point?
        IRA distributions/payment directly to an estate or trust is distributable net income….
        Also, where one-half of the trust is left to charity and the trustee powers permit non-pro rata distributions, what do you think of paying/distributing the IRA-DNI (and taxable portion of commercial annuity proceeds) to the charities in one year and the other non-IRD assets out in the next (1041) tax year?… I work for a charity and suggested this to the attorney for an estate/trust and she thought she had read that IRA proceeds can not be distributed as DNI… Thanks.

        • Dave,

          I am not sure what “last point” you are referring to. An IRA distribution is DNI. See IRC 643(c) and Treas. Reg. 1.663(c)-5, Example 6.

          In your example, I think both non-pro rata distributions can be made in the same year.

          Dave

  5. My situation is that no beneficiaries were named in multiple traditional IRAs (one bank only, as custodian), so that the estate is beneficiary by default. Multiple beneficiaries are named in Will’s residuary clause at varying percentages. What is the proper way to title the IRAs collectively (assuming that we combine the multiple IRAs into one inherited IRA)? Is each of the following appropriate: 1. John Doe IRA Deceased Jan 1, 2013 FBO the estate of John Doe Deceased, James Roe, executor, as beneficiary; or 2. The estate of John Doe Deceased, James Roe, executor, as beneficiary of John Doe, traditional IRA.
    The custodian bank seems reluctant to keep the deceased owner’s name on the account. A representative from the bank informed me that it is necessary to “transfer the IRA into the name of the beneficiary”. My concern is that if the custodian bank puts the IRA in the estate’s name (as the owner) the IRS may treat this as a prohibited roller and as a taxable distribution.
    Thank you.

    • Kal,

      I have been involved in a number of these.

      I recommend that the executor sign an assignment that transfers its beneficial interest in the IRAs to the beneficiaries named in the will based on their respective percentages. The bank will then set up separate “inherited IRA” (sometimes known as “decedent IRA”) accounts for each of the individuals. The RMD for each account will be based on the decedent’s remaining life expectancy, not the life expectancy of the beneficiaries. Every bank has a slightly different way of titling inherited IRAs, so I would not agonize on the exact words the bank uses. Generally, it should be something like “John Smith, deceased, for the benefit of Joseph Smith.” The important part is to get confirmation from the bank that the funds will end up in inherited IRAs, and will not be paid to the estate. Second, the bank should be able to reassure you that they will not be issuing a 1099 showing a taxable distribution. This is sometimes easier said than done, since banks can be difficult.

      Dave

  6. Dave,

    My mother passed away this year without beneficiaries on one of her IRAs at the age of 74. The will leaves everything to me and my 2 brothers. I am the administrator of her estate and I work at the financial institution where she had her IRA. My understanding of the article you posted on 11/23/11 is that we can set up inherited IRAs for myself and both of my brothers and take distributions over what would have been the remaining life expectancy of my mother. To complicate matters more, she had 2 other IRAs with designated beneficiaries (myself and my brothers). Thank you.

    • Barry,

      Your analysis is correct. The only potential obstacle is getting the financial institution to cooperate. Hopefully, you have some “pull.”

      Dave

  7. Dave,

    A couple of follow up questions. One of my mother’s IRAs had me as sole beneficiary. Can I disclaim 2/3 of this IRA to give my 2 brothers equal shares? I believe the disclaimed amount would go through the estate. Would I need an attorney to draft the document? Thank you.

    Barry

    • Barry,

      The short answer is probably.

      In general, one who disclaims is treated as having predeceased the event instigating the disclaimer. Our initial focus should be the account agreement. Specifically, does it provide that the share allocable to a predeceased named beneficiary goes to his descendants, or to the IRA owner’s estate? An attorney can easily draw up a disclaimer, but you should ask the brokerage account if it insists that its preprinted form be used. Assuming the default beneficiary is the estate, you can disclaim 2/3 from the probate estate, although your descendants would probably have to disclaim too. (I am assuming that the will allocates your share to your descendants if you predecease your mother.) Your siblings would have to withdraw their inherited IRAs based on your mother’s remaining life expectancy.

      Dave

  8. I am dealing with an IRA where the estate was the beneficiary due to there being no named beneficiary. The IRA provider is Merrill Edge. I’ve told them that I want to transfer the IRA to the beneficiaries of the estate, in-tact. They’re saying that the way to do this is to “bypass” the estate, though I can’t get them to explain what that means. My questions are: 1) have you had any success dealing with Merrill Edge and getting them to agree to a plan-to-plan transfer out of an estate to the beneficiaries of the estate. 2) Any guesses as to what they might be meaning when they say they’ll need to “bypass” the estate to achieve the transfer that I’m asking for. 3) Is there any specific language that helps to communicate the request to the bank so that they can clearly say if their policies allow it? I can’t tell if the person I’m talking to at Merrill Edge understands what I’m asking for or not.

    • Mike,

      I have not worked with Merrill Edge, and have no contacts there.

      I like their decription of “bypassing the estate,” since that is also how I envision the requested transaction. When the dust settles, the IRAs will be titled “John Smith, deceased for the benefit of Jimmy Smith.” The estate is not mentioned anywhere, which is what we want. In my communications with brokerage houses, I emphasize what I don’t want to happen. In particular, I do not want the brokerage house to write a check payable to the estate, and I do not want the brokerage house to issue a 1099 to the estate. If they can avoid these dead ends, chances are they will do the right thing.

      Your inquiry to Merrill Edge should be: When the dust settles, will the individuals who are named as beneficiaries under the will end up with separate inherited IRA accounts? If they say “yes,” you are on the right track. I also tell them that the estate is assigning its beneficial interest in the IRA to the beneficiaries, so that we end up with the same result as if the beneficiaries of the estate had been named as beneficiaries of the IRA.

      Dave

  9. Dave, I am dealing with MetLife, my brother died at 50 years old with a MetLife IRA where the estate is the named beneficiary.(Why the advisor at Capitol One who sold him the IRA allowed this I don’t know) His will, made the same day as the beneficiary change, leaves the IRA in trust split equally between his wife & daughter. I am the executor of the trusts. Metlife will only allow one lump sum distribution to the estate within 5 years from date of death. I tried to get them to transfer trustee to trustee to Fidelity inherited IRA trusts, one for his wife and one for his daughter. They sent me a letter stating any 1035 exchange must be a new contract for the benefit of the estate. My questions are: How does this 1035 rules apply? Is there any chance to through the IRS or court to correct the beneficiary error, the will made the same day establishes the trust and names the Metlife contract?

    • Joseph,

      Met Life is correct that the five-year rule applies if the IRA owner dies (with the estate as beneficiary) prior to the age 70 1/2 required beginning date. You can delay making the distribution until the last day of the fifth year (after the year of death), but not beyond that date. I don’t know why Met Life is insisting that everything has to be taken in one distribution, rather than perhaps five. I have not tried to use Section 1035 exchanges in this context, and believe Section 1035 is limited to life insurance.

      Dave

  10. My father’s IRA was left to his estate. In 2013 the entire amount (approx. 100K) was distributed to the estate and the executor has received a 1099R for 2013. I’m afraid this is now all taxable since the executor did not distribute any of the money during 2013. Am I right that it is all taxable?

    • Dan,

      If the estate’s income tax return is based on a calendar year, the executor actually had until February 14, 2014 (65 days after the end of the year) to distribute funds and pass the taxable income out to the beneficiaries. See IRC 663(b)(1). But if no distributions were made by February 14, the entire IRA distribution is taxed to the estate at very high marginal rates.

      There is one escape hatch. If the executor files the estate’s income tax return on a fiscal year, he still may have time to make the distributions. For example, if your father died on July 15, 2013, your executor can choose 6/30/2014 as the fiscal year end and buy some more time.

      Dave

  11. Dave,
    Great article and discussion!
    My mother named a Designated Beneficiary Trust for me as beneficiary of an IRA account. I am 61 and the trust provides that any beneficiary attaining 45 may withdraw all or any portion of the trust. I want to utilize the stretch out payments, but as simply as possible. The IRA custodian is UBS and they seem agreeable to changing the IRA account to me as an inherited IRA from my mother and using my life expectancy for RMD calculations.
    If UBS will set up the account as an inherited IRA, can I rely on this?
    As I said, I want to use the stretch out provisions but keep the administration and tax filing requirements to a minimum.

    • Rick,

      The short answer is “yes.” You can rely on the inherited IRA account. You are very fortunate that UBS is cooperating on transferring the trusts’s interest in the IRA to your personal inherited IRA account, which avoids having to file trust income tax returns every year. A number of brokerage houses are incredibly inflexible on this type of thing, and incredulously insist that the beneficiary is stuck with the trust forever.

      Dave

  12. My situation is similar to Dan’s above. My father passed away in 2013 and left his IRA to the estate. In the will I was the beneficiary, my brother is the executor. My brother had the management company cash in the IRA and gave me the check to deposit with the caveat that I needed to claim it on my taxes. I haven’t received a 1099, I called the company and they said it should have gone to my brother as executor. I’m trying to do my taxes, but don’t know how to claim the money. The management company told him it would be better for me to claim it as income as it would be taxed at my rate rather than the higher estate rate. I’ve asked my brother about the 1099, even if he has it would it not be in the name of the estate and not be usable on my tax return?

    • Lane,

      I agree that your brother has made a mess of things. You have not received the 1099 since it was issued to the estate. The proceeds are taxed to the estate, and the estate’s taxable income (commonly known as DNI) spills out to your personal return only if the distribution is made in the final taxable year of the estate. If, for example, the first taxable year of the estate began on September 9, 2012 and ended August 30, 2013, and the IRA was paid to you in August of 2013, the proceeds would be taxed solely to the estate and none would be taxed to you. I am guessing / hoping that the proceeds were distributed to you in the last taxable year of the estate, so that the income carries out to your 1040. Assuming it does, you should get a K-1 from the estate’s Form 1041 showing the pass-through income. The K-1 amount will be net of all estate expenses, and should be less than the IRA proceeds. Your brother took a short cut and made a mess.

      Dave

  13. Decedent passed at 83 with $400k IRA and estate as beneficiary. He was married at the time and his wife was sole beneficiary under the Will. Is there any instances where under a PLR she is then able to treat the decedent IRA as her own IRA and use her own life expectancy as RMD. I’ve heard some custodians will oblige with an indemnifcation letter – e.g Vanguard. But I reallly want to know what PLR (if any) allows the surviving spouse to change to the more favorable RMD.

  14. Dave,

    Your column is really very insightful.

    My brother died last year intestate. My sister is the administrator and sole beneficiary of his estate (my elderly mother and I have disclaimed any rights
    to the estate assets). Included in my brother’s assets is an IRA with a brokerage
    firm, with no named beneficiary. The brokerage firm’s policy for an IRA with no named beneficiary is to have it go to the estate. We are trying to convince them to simply transfer the IRA to my sister in the form of an inherited IRA, but they are pushing back that it has to go to the estate. I would think it would be in everyone’s best interest to do this–especially as it is my sister’s intent to have the inherited IRA stay at their brokerage firm. Is there a compelling argument that you can suggest that would allow the brokerage firm to feel comfortable with simply transferring the assets to the inherited IRA?

    Many thanks,
    Marc

    • Marc,

      When a brokerage house says “no,” trying to convince it otherwise is usually futile. (An exception is sometimes available for customers who have a huge account that the broker does not want to lose.) But there is a solution. Just move the account to Fidelity or Vanguard, which will cooperate. When the dust settles, you sister can always transfer her inherited IRA account back to where it is now. The RMD will be your brother’s remaining life expectancy.

      Dave

  15. I am the executrix of an estate with 18 heirs and 50,000 of our 171,000 is in an IRA. She was ninety-one. I cannot do the distribution except in a lump sum and I am having trouble finding someone to give me the exact answer to what needs to be done. Help

    • Belinda,

      The first question is whether the beneficiary of the IRA is “the estate,” or the 18 individuals. If the estate is the beneficiary, you will instruct the IRA custodian to issue a $50,000 check to the estate. But you should coordinate this with the distributions from the estate to the individuals (i.e., make sure the IRA distribution and the distributions to beneficiaries are in the same tax year) so that a Section 661 distribution deduction is allowed to the estate, thereby causing the distributable net income to be taxed to the individuals.

      Dave

  16. Dave, Thank You for your many helpful comments to others’ prior posts and questions … I am the Executor of my godmother’s estate; she died recently at 89 and, regrettably, I have just discovered she designated her estate as the beneficiary of her mid-six-figure traditional IRA. Her will designates 11 parties, including 5 charities, to receive $-bequests in fixed $-amounts, and then me as the sole beneficiary of her Residuary Estate. Her will explicitly states all designated beneficiaries are to pay their fair $-share of the income and death taxes (and administrative costs) payable by the estate, which are to be proportionately allocated by her Executor … Finally, her non-IRA liquid $-assets total more than enough to satisfy the $-distributions to the 11 beneficiaries … Can you help me please to identify my distribution options, if any, that may be preferable to simply funding the 11 $-bequests using the non-IRA funds? … I have just set up an Inherited IRA account but have not yet commenced with any transfers or distributions … The options to use the original IRA assets to make beneficiary distributions are unclear to me, and I would of course prefer to minimize my own and the estate’s tax liability by utilizing the wisest distribution strategy available to me … THANK YOU for any advice or guidance you might provide; your help is greatly appreciated … George H

    • George,

      There are no good options.

      The best possible result is convincing the IRA custodian to transfer the estate’s beneficial interest in the IRA to an inherited IRA for you. This is always a fight. Another problem is that you are stuck with the RMD of your godmother, which is only about six years. Another issue is that this strategy shifts all of the embedded income taxes to you. Unless a taxable IRA distribution is made to the estate, there are no income taxes to apportion to the takers of the fixed dollar gifts. And if you take a taxable distribution, most of the income taxes will be allocated to you as the residuary beneficiary.

      The estate probably has a malpractice claim against the godmother’s attorney. Had the attorney advised your godmother to designate an individual as beneficiary of the IRA, the individual could have taken the funds over the individual’s life expectancy. Under the present plan, you will have a lengthy fight to convince the IRA custodian to distribute the estate’s beneficial interest in the IRA to you — intact — as an inherited IRA, and then you still must withdraw the funds over six years.

      Dave

  17. Mother dies has an IRA in the amount of 800,000.00 with a residuary trust as the designated beneficiary. She has three adult children as the beneficiary of the trust. The provider will only issue the check to the trust. Anything they can to to avoid taxes..

    • Gary,

      The answer is yes.

      First, move the IRA to a more cooperative custodian, perhaps Fidelity or Vanguard.

      Second, set up inherited IRA accounts for the three individuals.

      Third, provide written instructions asking the custodian to transfer 1/3 of the trust’s beneficial interest in the IRA to each of the three accounts. Each of the children can then withdraw the IRA over the remaining life expectancy of the oldest child.

      Dave

  18. My father died at 88 years old with a will naming myself and two siblings as heirs since my mother passed away a year earlier. I was named personal representative in the will. I did my research and found his estate qualifies for Oregon’s Small Estate process. I filed the affidavit and I am working through the process except for one bank IRA worth ~30k. The bank is demanding “Letters of Testamentary” in order to transfer the the IRA to the “estate”. I have tried to explain to them that the Small Estate procedure does not issue Letters of Testamentary” but they are still demanding them, I have also tried to explain that there is no “Estate” for them to distribute to. They are saying that since my father didn’t update his IRA beneficiary to his children after my mother died the distribution has to be to the estate. I understand the tax issue and ask that they distribute the IRA in thirds to each of his children and report the distribution against our SSN’s. The value is small enough that a incremental distribution isn’t going to make much difference in the taxes owed. Any advice on how to get the bank beyond the Letters of Testamentary”?

    • Todd,

      You may need to transfer the IRA to a different bank. A small estate affidavit should be satisfactory, and it would be unconscionable for the bank to insist on letters testamentary of a full probate. A certified copy of the filed small estate affidavit is all that is required. I suspect the person at the bank is inexperienced. Having said that, I think the proper payee is the estate (or the small estate affiant), not the three individuals. Since the will has not been probated / proven, the bank has no assurance that the three children are indeed the beneficiaries.

      Dave

      • Dave,
        Thank you for your response and all of your responses to the other questions. You are providing a great informational forum here.
        I have two follow-up questions based on your answer.
        1) I don’t see any less authority in the will of a “Small Estate” versus a full probate. My fathers will was filed as part of the “Small Estate Affidavit” and was approved by the Judge. Since the will could be challenged in either case, small estate or full probate, how is the will any less “official” with a small estate.
        2) My reasoning in asking for the distribution to the heirs listed on the small estate affidavit was for tax purposes. If the bank distributes the funds to myself as the “estate” since there isn’t an estate as in the full probate process, then the tax liability will be reported solely against my SSN. As the “estate” representative per ORS114.545.1.f, I have the authority to distribute assets prior to 4 month closing so long as the heirs understand their liability back to the estate to the limit of the amount received. How else should the tax liability be spread to my two siblings?

        • Todd,

          You can probably spread the tax liability by getting an EIN for the estate and reporting the income on a 1041. Each beneficiary will be provided a K-1 to report 1/3 of the income. If you provide the bank the EIN, they should be willing to tax it to that number.

          Dave

  19. Dave,

    My father passed away and left a 401k plan for $130k. There were no beneficiaries listed on this plan. The policy of the brokerage that held the account was an immediate check to the estate less 10% tax. I have not cashed the check to the estate since I am trying to figure out the best way to handle it. There are only 2 possible beneficiaries, myself and my brother. Is there any way to do an indirect transfer into an inhereted IRA at this point, or do we just do distributions and pay the taxes. My father passed 12/3/13 so I believe all of this has to be done before Dec. (not too sure)

    • Marie,

      It is possible for the executor of the probate estate to transfer the estate’s beneficial interest in the IRA (intact) to inherited IRA accounts for the beneficiaries of your father’s estate. They would have to withdraw the funds over your father’s remaining life expectancy. Many brokerage houses will not cooperate on something like this, so you may have to move the account to a more user friendly brokerage. In all events, don’t cash the check.

      Dave

      • Dave,

        I have tried to work with the brokerage group and according to the agreement with the employer the estate account is expensed immediately. The will not do anything other than a check. Can I take the check to a brokerage?

  20. Dear Dave,
    I am the trustee of my brothers trust. He died at age 71 in Sept 2014. He had an IRA with Morgan Stanley $110K. The trust was named as the Beneficiary of the IRA. The Beneficiaries of the Trust are my sister and myself ages 64 and 62 respectively.
    We have reasons to keep the Trust as an instrument to protect liability on some notes owned by the trust ie. We don’t want to terminate the trust. I will keep my portion of any assets at Morgan Stanley. My sister wants to move her portion to Fidelity. Morgan Stanley has told us that in order to create Inheritance IRA’s for my sister and myself that:The Trustee hereby (A) certifies that (i) the Trust is a valid trust under state law; (ii) the Trust is irrevocable;(iii) the Trust beneficiaries with respect to the Trust’s interest in the decedent’s IRA referenced above are identifiable from the Trust instrument; and (iv) required documentation has been timely provided to Morgan Stanley, and (B) represents that the Trust is in fact terminating and the Trustee must distribute or transfer the Trust’s assets.

    The issue of contention is “(B) the Trust is in fact terminating” which Fidelity says is incorrect and Morgan Stanley said is required.

    The estate value in Stocks, bank accounts and iis $1.2 Million plus two 30 year notes secured by deeds of trust at 5.75% amounting to $350,000.00. Keeping the notes in the Trust and paying out the monthly income is our plan because the Trust provides a liability layer for the notes, according to council.

    What is your position on the wording regarding Morgan Stanley stating the Trust Must Be Terminating?

    Thank You
    Steve

    • Steve,

      Conceptually, the trust is distributing its beneficial interest in the IRA (intact) to you and your sister. This can be accomplished without terminating the trust with respect to its other assets. One could say that the trust is terminating with respect to the IRA (but nothing else), but the more common expression is that the trust is making a partial distribution.

      Dave

  21. David,

    Situtation is this- Mother died in August 2014 Had IRA with no beneficiaries designated. So it effectively becomes Estate IRA as I understand it. Her Estate in excess of 5.34mm so there will be tax due in May of 2015. Had some issues with trust and will got done last minute-poor planning on her part. Custodian not recognizing designation of trust as bene or anything else. Are we stuck with this as Estate IRA -had to go probate on Sep30.
    Can we still request designation of benficiaries under Court docs filed prior to her death. granted filed just before.

    • Joe,

      The tax laws allow the estate to transfer its beneficial interest in the IRA (intact) to the trust, and the trust can in turn transfer its beneficial interest in the IRA (intact) to the beneficiaries. Whoever ends up with the inherited IRA is stuck with the decedent’s remaining life expectancy.

      Now for the hard part. Many custodians will not cooperate. Fidelity and Vanguard usually will. You will probably have to move the IRA if the custodian is refusing to cooperate, which is common.

      Dave

  22. Dave,

    My father passed away in Dec 2013, he did not have any beneficiaries listed, and therefore according to the terms of his shared savings plan, the entire account was immediately disbursed and a check was cut. I tried to work with the firm however they stated that this was the rules of the plan and they are not moving on this position. I have not deposited the check because I am wondering if I have any options. Since the check was issued this year and the Estate Tax Year is Dec to Nov based on his passing, I believe that if I deposit the check I have to distrubute the amount to myself and my brother before the end of Nov. for it to be considered a pass through. Any recommendations?

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