[WSBAPT] IRA Payable to Estate - PR"s authority to distribute in kind or cash and distribute cash (with K-1)

Thu Oct 27 15:53:45 PDT 2022

Liv and Jeff,

Totally possible to do the 5-year option. I did this with an IRA of 1/2 Jeff's amount and only 2 very cooperative (mother-daughter) beneficiaries.

We kept a probate open for 5 years and did annual distributions, tax returns, and K-1s to lower the income tax hit and obtain additional gain over time. (The 5th year was a few years ago, lucky them.)

Note that (if the decedent hadn't already started taking RMDs) the distributions do NOT have to be even/equal over the 5 years. We took more in some years and less in others.

It's not the worst thing to keep an estate open if these kinds of numbers justify it and a smart CPA "gets it" and can do it.

But with 10+ elderly beneficiaries, I can see where that really could become a nightmare.

So curious what solution you come up with. Hope everyone is agreeable ultimately.

Take care, Josh

From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Liv Wernecke
Sent: Thursday, October 27, 2022 4:22 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] IRA Payable to Estate - PR"s authority to distribute in kind or cash and distribute cash (with K-1)

Consider whether you may have 5 years to distribute:

IRS Proposed Reg 1.401(a)(9)-4 (b) Designated beneficiary must be an individual. A person that is not an individual, such as the employee's estate, is not a designated beneficiary. If a person other than an individual is a beneficiary designated under the plan, the employee will be treated as having no designated beneficiary, even if individuals are also designated as beneficiaries.

(A)       If the employee does not have a designated beneficiary, as determined under § 1.401(a)(9)-4, distributions must satisfy the 5-year rule described in paragraph (c)(2) of this section;

(2) 5-year rule. Except as otherwise provided in § 1.401(a)(9)-6(j) (relating to defined benefit plans subject to

Federal Register/Vol. 87, No. 37/Thursday, February 24, 2022/Proposed Rules                                                           10527

limitations under section 436), distributions satisfy this paragraph (b)(2) if the employee's entire interest is distributed by the end of the calendar year that includes the fifth anniversary of the date of the employee's death. For example, if an employee dies on any day in 2022, then in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii), the entire interest generally must be distributed by the end of 2027.

However, If the decedent died after her required beginning date, consider  Proposed Reg.   1.401(a)(9)-5(d)(1) (iii) "Employee with no designated beneficiary. If the employee does not have a designated beneficiary as of the date determined under § 1.401(a)(9)- 4(c), the applicable denominator is the employee's remaining life expectancy"

Is this an inherited IRA?
Good luck!!

Livingston (Liv) Wernecke
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From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Jeff at bellanddavispllc.com<mailto:Jeff at bellanddavispllc.com>
Sent: Thursday, October 27, 2022 1:39 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] IRA Payable to Estate - PR"s authority to distribute in kind or cash and distribute cash (with K-1)

We confirmed the estate is the beneficiary.  Its around a million dollars.  The percentages are between 3% - 7% with one getting 20%.  One thing, also, is most of these beneficiaries, themselves, are elderly.

Jeff

W. Jeff Davis
BELL & DAVIS PLLC
Attorneys at Law
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720 E. Washington Street, Suite 105
Sequim WA 98382
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From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Philip N. Jones
Sent: Thursday, October 27, 2022 1:19 PM
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Subject: Re: [WSBAPT] IRA Payable to Estate - PR"s authority to distribute in kind or cash and distribute cash (with K-1)

These are excellent questions.  I believe that there is no right or wrong answer. It might depend in part on the size of the IRA. If the IRA is relatively small, it might not justify creating inherited IRA accounts for each of the various beneficiaries, and liquidating the IRA would be the best option. On the other hand, if it is a large IRA, the liquidation of the IRA would deny the ability of each beneficiary to stretch out his or her payments into the future. If some of the beneficiaries want cash, and others want an inherited IRA, it would probably be best to give them each an inherited IRA, and let each of them decide when to liquidate their particular account. I say that because it may be difficult to work out the tax consequences fairly if some of them receive inherited IRA accounts and the rest receive cash from the estate after the estate has liquidated the rest of the main IRA account. Keep in mind that the distribution of an IRA intact does not carry out income, because most IRAs lack basis, and the code provides that an asset that lacks basis does not carry out income. As a result, you have to proceed very carefully when dealing with a situation like this. This is because an IRA constitutes IRD, or income in respect of a decedent. I'm assuming that this is a traditional IRA and not a Roth IRA. This is a complicated subject and will require some complex analysis. Proceed with caution.
Phil Jones

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From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> on behalf of Jeff at bellanddavispllc.com<mailto:Jeff at bellanddavispllc.com> <Jeff at bellanddavispllc.com<mailto:Jeff at bellanddavispllc.com>>
Sent: Thursday, October 27, 2022 12:43:53 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] IRA Payable to Estate - PR"s authority to distribute in kind or cash and distribute cash (with K-1)

Listmates:

IRA has no POD beneficiaries, so it becomes an estate asset.  Many residuary beneficiaries who take in varying percentages.  Administratively, the Personal Representative prefers to liquidate the IRA and distribute the cash (per the %) and each beneficiary would receive a K-1.  Does the PR have the right to liquidate the IRA, rather than offering the beneficiaries the option of taking their % in kind?  Does the PR have to consider the income tax consequences of each beneficiary?

Your thoughts and/or experiences.

Jeff Davis

W. Jeff Davis

BELL & DAVIS PLLC

Attorneys at Law
P.O. Box 510

720 E. Washington Street, Suite 105
Sequim WA 98382
Phone: (360) 683.1129
Fax: (360) 683.1258
email: jeff at bellanddavispllc.com<mailto:jeff at bellanddavispllc.com>
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