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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4063
Experience:  Juris Doctorate, 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: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi,

Customer :

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

Customer :

but how

NPVAdvisor :

It depends on the type of trust

Customer :

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

Customer :

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

Customer :

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.

Customer :

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.

Customer :

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

Customer :

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

Customer :

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.

Customer :

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 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

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Expert:  Lane replied 1 year 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 1 year 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

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