Brenner answers questions about all aspects of family finance.
I'm the executor of a small estate to be distributed to seven heirs: the four grown daughters of the 81-year old deceased, two minor grandchildren, and one nonprofit organization. The decedent's estate is the beneficiary of her $5,000 IRA. As executor, can I tell the custodian to distribute the IRA into the estate's checking account? I'd rather have the estate pay income tax on a single IRA distribution than have the account divided into seven inherited IRAs. The beneficiaries all agree with me. As executor, do I have this option?
Certainly. The government doesn't care whether the income taxes on IRA distributions are paid immediately by the estate or paid over the next few years by the heirs.
As the executor, you're responsible for managing the assets in the will until they're distributed to the heirs. These assets include the $5,000 IRA because it was left to the estate. Under the circumstances you describe, it seems sensible for the estate to pay taxes on the IRA and distribute what's left. The alternative is to divide the estate's inherited IRA into seven new inherited IRAs, each worth $714. If you do that, the heirs must empty those accounts over the remaining life expectancy of the 81-year-old decedent, says Barry C. Picker, a Brooklyn tax accountant. That's 9.7 years, according to the Internal Revenue Service actuarial table.
If the heirs had been named as the IRA beneficiaries instead of the estate, the account would have passed to them outside the will. And as the IRA beneficiaries, they'd have been able to stretch minimum annual distributions over their own life expectancies. For a 10-year-old, that's 72.8 years; for a 40-year-old, 43.6 years.
The bottom line When an IRA is left to an estate, its tax deferral expires much faster.
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