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Leaving an IRA to an Estate

What happens if you leave a traditional IRA to an estate?

I know it has to be distributed within 5 years, and that tax rates on estates are quite high.

So I ask:

1) Does it have to be distributed over the 5-year period, or can it be distributed all at the end? 2) Is the IRA a taxable entity within the estate? So if it is the only asset of the estate, is the estate taxable? 3) Do I correctly assume that the distributions of the IRA assets are not taxable events to the estate, but they are to the beneficiaries? 4) Does the estate have to file a tax return if it has no income? 5) What happens if the IRA assets are used to pay expenses of the estate, like debts of the decedent? Are the distributions then considered taxable income to the estate?
Reply to
Roger Fitzsimmons
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The 5 year rule is only applicable if the owner died before the RBD. If the owner died on or after the RBD, then RMDs are required using Table I factors for the decedents age in the year after death and by subtracting

1 from the factor for each year thereafter. If it is on or after the RBD, then one should create a beneficiary IRA for the estate. Yes, that's right, you can create a beneficiary IRA for the estate in the same manner you create a beneficiary IRA for a living person. In order to close the estate, the IRA needs to be closed. The IRA can be transferred (trustee to trustee) to beneficiary IRAs created for the estate beneficiaries. Each beneficiary then continues to take RMDs using the remaining life. Once transferred, the estate can be closed.

If the 5 year rule is applicable, the only requirement is that the assets be totally distributed no later than 12/31 of the calendar year that is the fifth anniversary of the death.

For estate taxes, the IRA belongs to the estate of the decedent at death.

It is taxable income to the estate.

No. But, if an RMD is required and not taken, then the 50% excess accumulation rule applies.

All distributions from the IRA are taxable income to the estate.

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Reply to
Alan

[snip]

Yes, to the extent the distributions are kept within the estate. However, if the estate distributes cash to the beneficiaries during the year, the income will flow with the cash and be taxable to the beneficiaries.

Ira Smilovitz, EA

Reply to
ira smilovitz

Thanks. The decedent was past his RBD. However, if the distributions are taxable to the estate that means most of them will get taxed at 39.6%, which makes the whole idea even worse than I thought at first. Thanks.

Reply to
Roger Fitzsimmons

As Ira said, if it's distributed to heirs and not kept in the estate, it will be taxed to the heirs rather than the estate.

Reply to
Stuart O. Bronstein

I don't think that's possible. In law, a dead person cannot inherit, as I understand things. Any bequest from A to a dead person is simply disregarded. If there is a secondary beneficiary, the bequest goes to that person; if not, it forms part of the residue of A's estate.

I'm not a lawyer, so take this with a grain of salt. But FWIW I'm pretty sure about the rule that dead people can't inherit.

Reply to
Stan Brown

A person can certainly leave an IRA to his own estate, and it gets administered along with the rest of the estate.

You're right that, traditionally, if a testamentary gift is made to someone who died, the gift lapses and goes back into the estate. But most states have enacted anti-lapse statutes saying that, unless there is an alternative intention, a gift to a deceased person goes to his heirs at law.

But that is an entirely different matter and has nothing to do with whether someone can leave an IRA to his own estate.

Reply to
Stuart O. Bronstein

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