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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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My mother passed away in Feb 2013, she left a traditional IRA

Customer Question

My mother passed away in Feb 2013, she left a traditional IRA which held all her assets to her estate as beneficiary. Her will has 8 beneficiaries name with different % pay outs. I have found on line, private letter rulings where people have requested from the IRS to be allowed to issue inherited IRAs to each beneficiary. I have been trying to find out how to submit this private letter for a ruling from the IRS. By doing this each person would pay at their tax rate when they withdraw from the inherited Ira instead of paying at the estate rate which I believe is 39.6% tax. She lived in New Jersey and only has about $260,000 and was 91. We were told pay outs would be based on her life expectancy which is 3 years so we could spread withdraws over 3 years. I am the executrix and want to understand the best thing to do with out paying half of her estate to the government. I have talked to her accountant and attorney with no help, they don't seem to know the law. I have many expenses to pay which will be about $100,000 of the funds. So I need to get something done soon and emotionally need to put it behind me. I am hoping you can help me. Thanks Paula
Submitted: 11 months ago.
Category: Tax
Expert:  Bill replied 11 months ago.

If the distributions are made to the estate and the estate passes those distributions through to the beneficiaries of the estate, then the distributions will be taxed to the beneficiaries at their respective income tax rates. The estate would not have to pay income taxes on the distributions. This would be accomplished by filing Form 1041 and giving individual Schedule K-1s to each beneficiary.

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3077
Experience: EA, CEBS - 34 years experience providing financial advice
Bill and 3 other Tax Specialists are ready to help you
Customer: replied 11 months ago.
So the 1041 is filing of estate taxes and then issue individual k-1 s to each beneficiary. Then the k-1 is used when filing individual returns for this year but we each have to take our full percentage as income this year correct ?
Is this process referenced in the IRS rules and regulations for the estate as beneficiary? If so where could I find it for back up? Or is this a way around the regulations? I just want to be sure in the event I was audited since I am responsible for the estate. Thanks
Expert:  Bill replied 11 months ago.

http://www.irs.gov/pub/irs-pdf/i1041sk1.pdf

The 1041 is to report income and pay income taxes on estate income, not estate taxes. If the income is passed through to the beneficiaries of the estate, then K-1s are given to those beneficiaries who then report the income on their individual tax returns.

 

http://livingtrustnetwork.com/forum/Probate-Issues/465-ira-payable-to-estate-estate-acting-as-pass-through.html

 

Customer: replied 11 months ago.
I've been told IRAs were not past through funds which is a concern with the K-1, do these apply to IRA funds as opposed to capital gains?
With this'd easy solution, then why do people bother getting private letter rulings from the IRS to disburse funds to inherited IRAs for beneficiaries which pay out over the deceased life expectancy ?
Also the second link your sent for the forum does not work so I couldn't read that info.
Customer: replied 11 months ago.
Relist: Incomplete answer.
Expert:  taxmanrog replied 11 months ago.

Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

 

You really don't need to get a private letter ruling (PLR). There are already rules in place, and you can use existing PLRs to cover your situation if the fact pattern is similar enough.

 

If the trust is written to follow strict IRS guidelines commonly known as
"see-through" or "conduit" trust rules, the trust can be beneficiary without any big problems. Although the income-tax rates that trusts pay are generally higher than income taxes paid by individuals, your heirs can avoid paying the high trust rate if the trustee can pass all the IRA distributions out to the individual trust beneficiaries. So you need to be sure that, if the trust is named as beneficiary, and the trustee has the latitude to do this, the IRA distributions won't get trapped inside the trust. The beneficiaries can roll them into their own IRAs. That is assuming that the trust was written by an attorney who knows about trusts and IRAs.

 

If the trust is the beneficiary and does NOT pass the IRA through to the beneficiaries, the trust would have to draw down the IRA in installments every year over the life expectancy of the oldest trust beneficiary.

 

If the estate does take the distributions from the IRA, it is income to the estate, but the estate gets a deduction for any distributions that it makes. So if the estate drew down $80,000 from the IRA, but turned around and distributed all of the funds to the beneficiaries of the estate, the estate would get a deduction equal to the amount distributed, in this case $80,000. The estate would have no taxable income, and each beneficiary would be taxed at his or her own tax rate. The problem with this is that the distributions might be significant enough to cause the heirs to pay a higher income tax rate on their personal returns. So careful planning to keep everyone happy is a must!

 

I hope this helps answer your questions! If you have any more, please feel free to ask away! I will be happy to help! If you have found my answer to be helpful, please remember to rate me highly. I would appreciate it!

 

Again, thanks! Have a great week!

 

Roger

Expert:  Bill replied 11 months ago.

I'm sorry that I didn't respond sooner but I did not have access to a PC.

Some people obtain private letter rulings in order to close the estate rather than to have to continue to make distributions to the estate over a long period and then have those distributions passed through to the beneficiaries. However, in your situation this doesn't seem necessary as the remaining life expectancy is short (which will permit you to close the estate sooner) and the amounts being distributed to each beneficiary are relatively small ($32,500 each) which may not push the beneficiaries into higher tax brackets. The distributions could either be made all this year, or a portion this year with the balance next year.

 

http://www.ataxplan.com/bulletinboard/ira_providers.cfm

 

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