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Posted by gyropilot on January 10, 2007, 9:57 pm
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I could use some help with a rare, and possibly complex, IRA
related tax situation...
Background:
Both of my wife's parents died last year within a very short
time of each other. They had separate traditional IRA's.
After their deaths we discovered they had named each other
as the beneficiaries on their IRA's, with no
contingent-beneficiaries.
Since no named beneficiaries were left to inherit their
IRA's, the institution where the IRA's are held combined the
two accounts (a spousal rollover) into a single IRA naming
the Estate as the beneficiary.
There was no will, but my wife was named the sole heir to
the Estate through probate. She's also the Administrator of
the Estate.
A copy of the court order designating my wife as the legal
sole heir to the Estate was recently provided to the
institution holding the IRA, with the request that they
rename the account with my wife as the beneficiary (for
example: Estate of "Her Parents" for the benefit of "My
Wife"). But the institution holding the IRA tells us they
can't do that because my wife wasn't named as a
beneficiary... court order as sole heir not withstanding!
They say that's per IRS rules.
So I called the IRS's tax law help line to verify whether or
not the institution has this right, but they didn't know the
answer off hand but promised to research it and get back to
me.
Assuming the institution holding the IRA is correct and the
Estate must be listed as the beneficiary, I'm trying to
understand the tax implecations for the Esate and my wife
(and I).
Questions:
1. How does having the Estate as the beneficiary affect
required distributions? As a "non-qualified" beneficiary,
my wife and I knew under current tax rules she'd be required
to distribute the entire IRA by the end of the fifth year
following her parent's deaths. But does this same five year
limitation also apply to the Estate?
2. How are taxes paid on the IRA distributions if the Estate
is the beneficiary and techincally receives the funds?
Specifically, does the Estate have to be kept open to file
and pay income taxes on the distributions?
3. If the Estate does have to pay income tax on the
distributions, does my wife then have to pay any income tax
on the remaining funds when she receives them from the
Estate?
4. Even with the IRA naming the Estate as the beneficiary,
can my wife instead accept the distributions directly
(effectively bypassing the Estate) and pay the income taxes?
I'm planning on meeting with a local CPA to discuss these
issues but would appreciate hearing some comments and
opinions here first.
Thanks in advance,
John
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