Form 1041 IRA Distribution

[mysanity88]

My client's estate received a 1099-R for an IRA distribution. I spoke with the executrix regarding the form, and she confirmed that the estate was the beneficiary of the IRA (no individuals designated). She informed me that the custodian created an inherited IRA for the estate, then distributed checks to the beneficiaries of under the deceased's will from that IRA.

Given this process, my understanding is that I will of course need to report the 1099-R taxable amounts on line 8 1041 and flow through to the beneficiary K-1's on line 5. Does this sound correct? Given the way the amounts were distributed, would the beneficiaries have to be taxed on these amounts?

[Accountant-Man · Accepted solution]

One step at a time. Since there were no beneficiaries named for the IRA, the estate is the taxable recipient of the IRA. I don't think this part is right, <<the custodian created an "inherited IRA" for the estate>>, but the end result should still be that the estate is the taxable recipient.

The estate should be the one issuing checks to the benes, not the custodian, but again, that is probably okay.

Since the estate is the beneficiary, it pays tax, if any. It depends on the terms in the will whether or not the estate distributes the money, resulting in zero tax to the estate and income (and possible tax) to the benes.

I hope the custodian didn't withhold any income tax on the IRA distributions. then it will get messy.

You are correct about line 8 of the 1041 and line 5 of the K-1s.

[mysanity88]

Yes, the custodian setting up an IRA for the estate and distributing checks did raise my eye brow and was the main point of confusion for me. Honestly, I have not ran into that scenario before. 

The will does list four beneficiaries to which all property should be distributed equally. 

You mentioned withholding taxes...The executrix informed me that each beneficiary attempted to have income tax withholding on their distributions. However, the custodian did not do that for the beneficiaries. But, an amount was withheld and listed on the estate's 1099-R (reported on 1041 Part II- Payments Line 14). In other words, withholding did occur when the estate "received" the IRA proceeds, but no withholding when the beneficiary's received their share of the account.

Given that, my view is that the estate would distribute the income to the beneficiaries and any potential taxation. Am I processing the situation correctly or is additional due diligence required?

[garman22]

To me it sounds like the check was paid to the estate and the estate distributes the monies to the beneficiaries. The estate will file for refund on the taxes that were withheld. I agree with @Accountant-Man that if the custodian/trust withheld taxes at the distribution level, it would get super messy. 

[BobKamman]

Have you asked the beneficiaries if they have received a 1099-R?

[mysanity88]

I forgot to mention that in my reply. I confirmed through the executrix that the beneficiaries did not receive 1099-R's. In fact, she told me that they requested such documents, but the custodian was only able to provide the 1099-R to the estate.

[BobKamman]

I think the glitch in your question was that the IRA custodian did not create inherited IRAs for each beneficiary -- it just created separate accounts for each of them.  Was it an insurance company, by any chance?  I have seen them do this because they hate to give up money.  As long as the beneficiary has an account, they are "customers" and the "do not call" rules do not apply.  The parasitic commissioned salespersons are free to pursue their cash.   

You can't tell the guy who caused the problem to be more careful next time, because he's dead.  

[JenniferRJones]

So, you report the 1099R on the 1041 return. This generates K1's for the beneficiaries that they use to report their portion of the distribution on their own tax returns. The company distributed to the estate, so they will NOT generate 1099R's for the beneficiaries. 

[luck42]

"I hope the custodian didn't withhold any income tax on the IRA distributions. then it will get messy."

So what if this situation did happen?  What steps should be taken to correct it?

[qbteachmt]

I recently had this sort of a fight with Schwab, where they insisted on forming an inherited IRA as the first step. I knew I had read about direct transfer options. Here:

https://www.wealthmanagement.com/estate-planning/ira-goes-estate-inherited-iras-individual-beneficia...