Estate "Form 1041" IRA Distribution

[Sabre]

I am preparing an estate form 1041. The estate had an IRA which was distributed to the three beneficiaries(his children). My understanding is that they can rollover these amounts into IRAs or take the funds and pay taxes. As the preparer of the return what evidence do i need to obtain to prove a rollover? Is there any disclosure that should be on the K-1 or added to the return? The company that had the IRA gave the Estate a 1099-R showing the gross distribution in box one and nothing in the taxable box with a coding of Death benefit.
I thought i read somewhere it had to be a trustee to trustee rollover to qualify for non-taxable treatment. There was no tax on this estate.

Kirk

[jrumbold]

IRA Beneficiary

Were the three children named as beneficiaries of the IRA, or just beneficiaries of the estate? It sounds like the IRA had no named beneficiaries, otherwise the custodian of the IRA would have paid out directly to each of the children and they would have been given the choice by the custodian of rolling it over. If there was no named beneficiary on the IRA then it gets paid out to the estate and it is taxable to the estate. This is probably why the estate got the 1099-R. The children would each get their share of the proceeds of the estate less the income tax and any estate tax.

[ChEAr$]

And with no rollovers allowed.

[ChEAr$]

I am preparing an estate form 1041. The estate had an IRA which was distributed to the three beneficiaries(his children). My understanding is that they can rollover these amounts into IRAs or take the funds and pay taxes. As the preparer of the return what evidence do i need to obtain to prove a rollover? Is there any disclosure that should be on the K-1 or added to the return? The company that had the IRA gave the Estate a 1099-R showing the gross distribution in box one and nothing in the taxable box with a coding of Death benefit.
I thought i read somewhere it had to be a trustee to trustee rollover to qualify for non-taxable treatment. There was no tax on this estate.

Kirk

By saying "there was no tax on this estate." are you saying there was no estate tax?
Okay that's fine. But, since the estate is beneficiary of the IRA, it's taxable income for
the estate on the 1041.

[DMICPA]

IRA Distribution to Trust

Client died (94 yrs old)and the Beneficiary of the IRA was the Living Trust estate. The Trust beneficiaries are the two adult children. Total IRA is about $12,000.
What I read is that the 1099-R may be issued in the name of the Trust and eventually passed through to the two adult children.
So what happens? The 1041 picks up the income on the face of the 1041, deducts expenses and the two children get what is left on their individual K-1 forms?


IF the beneficiaries were the two adult children, they would each report incom of $6,000 on their 1040s.

Now, since the 1041 has to report it, the net goes on a K-1 and they will report the $6,000 less the administrative expenses?

Is this correct?

[appelman]

Huh?

What is a "living trust estate?" The beneficiary can be a trust, or it can be the estate, but it can't be both at the same time. Ordinarily a living trust becomes irrevocable on death, and things are arranged so that all assets are swept into the trust. The "estate" then has a fleeting existence. A 706 may still be needed, but usually not a 1041. But, has been suggested by other posters, the trust as beneficiary is denied some options available to an individual beneficiary. Hopefully, the trust has been written to qualify as a "see-through" or "conduit" trust, in which the trustee has the authority to pass all IRA distributions through to the beneficiaries. In that case the beneficiaries will be taxed, not the trust.

[DMICPA]

Trust receiving IRA Proceeds

The Trust was formally a living trust. Now it is an irrevocable trust. The two adult children are the beneficiaries. The amount of the gross estate is well below the $5,120,000 estate for 2012.
Of course the beneficiaries are going to receive the pass through on their respective K-1 forms.

My question was that the IRA proceeds, if payable to the Trust, are recorded on page one of the 1041. Any applicable expenses would be a deduction either subject to 2% or not.

The bottom line is the beneficiaries would ultimately pick up the IRA proceeds on a K-1 rather than a form 1099-R Since the IRA was only $10,000, each beneficiary wants to receive the entire amount of $5,000 each because their tax bracket is low and they want the money.

Is this line of thinking correct?

[appelman]

Distribution deduction

The distributed IRA proceeds, net of allowed expenses, will be taken as a deduction by the trust. It will also be the total of the amounts reported as income on the K-1's. If the trust's accounting is such that it pays expenses out of corpus, it may distribute the entire IRA distributions, but the taxable amount reported on the K-1's is still limited to the distribution deduction. This is a little perq for beneficiaries, though not all states conform. Some, notably PA, tax the entire amount distributed, regardless of what the K-1 says. And unless there is other income that is not distributed, the trust will probably have a zero or negative AGI.

[DMICPA]

Thanks

Thank you for clearing this up. Most of the time I see that an IRA names people as the beneficiaries so there is no question as too who receives what and what amounts. The client did not seek my help and the banker just named the estate as the beneficiary.

If the adult children had been named, they could have walked into the bank, showed them the death certificate, and walked out with the funds. So far the bank has been stonewalling them with document requests, copies of the Trust, Trust Certifications etc.

I am aware of the unusual PA tax laws. PA recognizes gains but not losses. I have a client that sold two apartment buildings, one at a gain and one at a loss. They ended up paying on the one that sold at a gain but could not get any relief for the one that sold at a loss. However, the PA tax rate is lower than other states.

[appelman]

Most financial advisers discourage it.

That is, naming trusts and estates as beneficiaries of retirement assets. Probably the only good reason to do it is to protect a minor or incompetent beneficiary.

It's not quite fair to say that PA doesn't allow losses. Their system is pretty quirky, but not quite THAT quirky. I can't imagine quite what your client's situation was. The Form PA40 instructions give clear examples of netting gains and losses OF THE SAME INCOME CLASS. However. spouses can't net their separate gains and losses, and a net loss from any class of income is effectively lost to the taxpayer.

I do wonder how much the states would save in administrative costs if they would simply piggyback on the federal return, instead of developing their own complex bureaucracies to reinvent the wheel!