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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10428
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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if a person has an IRA and name a trust the beneficiary. Dies

Customer Question

if a person has an IRA and name a trust the beneficiary. Dies before making the distribution. The distribution is taxed by whom?
Submitted: 3 years ago.
Category: Tax
Expert:  Lane replied 3 years ago.

NPVAdvisor :

Hi,

JACUSTOMER-k5p05xhz- :

hello

NPVAdvisor :

Anyone who inherits an IRA will have IRD (Income in respect of a decedent) ... all that means is

NPVAdvisor :

THat when the beneficiary takes moey out of the IRA (and there are some rules arouns that) they will pay income tax

JACUSTOMER-k5p05xhz- :

but how

NPVAdvisor :

It depends on the type of trust

JACUSTOMER-k5p05xhz- :

in the funds were distributed into a trust. is the the taxable the trust, and through a k-1 for their prorate ownership the individuals are taxed?

NPVAdvisor :

If the trust is irrevocable (a separate taxable entity) .. it will pay the income taxes any time money is distributed

JACUSTOMER-k5p05xhz- :

how is this reported

NPVAdvisor :

If the trust is what's called a grantor trust (where the taxatin is simply pased through to the grantor of the trust) ... from a tax perspective, it's as though the trust isn't there

NPVAdvisor :

the grantor pays the income tax

NPVAdvisor :

for the iorrevocable trust it will beon the trust's tax return Form 1041

NPVAdvisor :

FOr the individual, 1040

JACUSTOMER-k5p05xhz- :

does the distribution get report on form 1041 ? and pay taxes at the trust rate?

NPVAdvisor :

That's correct (For the irrevocable trust)

NPVAdvisor :

A trust is a popular designation because it generally gives the IRA owner some degree of control over how the assets are distributed after he or she is deceased. However, while a trust is an effective estate-planning tool for many, an IRA owner must take some steps to ensure that the outcome is consistent with his or her needs.

JACUSTOMER-k5p05xhz- :

yes it is a irrevocable trust. What line would this go on on form 1041

NPVAdvisor :

Just a sec

NPVAdvisor :

Line 8—Other Income

Enter other items of income not included on lines 1, 2a, and 3 through 7. List the type and amount on an attached schedule if the estate or trust has more than one item.

Items to be reported on line 8 include:

  • Unpaid compensation received by the decedent's estate that is IRD, and

  • Any part of a total distribution shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that is treated as ordinary income. For more information, see Form 4972, Tax on Lump-Sum Distributions, and its instructions.

JACUSTOMER-k5p05xhz- :

so it would be reported on form 4972

NPVAdvisor :

NO, this is for Plan participants taking lump sum distributions, not for IRD

NPVAdvisor :

IF an individual were the beneficiary, it would be the same "Other Income"

NPVAdvisor :

but on the 1040

JACUSTOMER-k5p05xhz- :

the trust is the beneficiary, the funds were distributed to the trust so form 4972?

NPVAdvisor :

No, as I said form 4972 is for LIVING plan participants taking lump sum distributions

JACUSTOMER-k5p05xhz- :

ok, so were does this get reported?

NPVAdvisor :

beneficiaries of ORAs and qualified retirement plans (whether trust or individual) report as other income

NPVAdvisor :

line 8 on the 1041

NPVAdvisor :

again; (FROM IRS)

NPVAdvisor :

Line 8—Other Income

Enter other items of income not included on lines 1, 2a, and 3 through 7. List the type and amount on an attached schedule if the estate or trust has more than one item.

Items to be reported on line 8 include:

  • Unpaid compensation received by the decedent's estate that is IRD, and

  • Any part of a total distribution shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that is treated as ordinary income. For more information, see Form 4972, Tax on Lump-Sum Distributions, and its instructions.

JACUSTOMER-k5p05xhz- :

okay

NPVAdvisor :

specifically, Unpaid compensation received by the decedent's estate that is IRD

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Expert:  Lane replied 3 years ago.

Hi Frank,

... just checking back in, as I never saw you come back into the chat.

Here's an excellent article on designating a trust as an IRA beneficiary and the taxation of it.

http://www.investopedia.com/articles/retirement/04/081804.asp

Hope this helps

Lane
Expert:  Lane replied 3 years ago.
Hi Frank,


I'm just following up with you to see how everything is going. Did my answer help?

As a follow-up, here's a great article I found:
http://issues.flemingandcurti.com/2010/10/17/trust-named-as-ira-beneficiary-heres-how-it-works/


Let me know,
Lane