A good friend of mine recently died at age 74. I’m one of his three heirs and also his executor. His IRA beneficiary is his estate. I know that, unlike most inherited assets, IRA distributions are taxable income. Can we postpone or minimize these distributions?
Your situation is complicated by the fact that the IRA beneficiary is the estate. Unlike human beneficiaries, an estate can’t stretch IRA distributions over its life expectancy because it has no life expectancy.
The best-case scenario: If the IRA’s owner was over 70 1/2 when he died, the estate’s heirs can empty it over his remaining life expectancy according to the IRS ‘”Single Life Expectancy” actuarial table, says Barry C. Picker, a Brooklyn tax accountant and IRA expert. If he was under 70 1/2, they must empty it within five years.
If you transfer the IRA to the estate, however, the heirs will owe taxes on their shares right away. Here’s what Picker recommends instead: As executor, tell the IRA custodian to put the account’s investments in cash. (Inside the IRA, this doesn’t trigger taxes.) Then have the custodian create three inherited IRAs for the heirs, and in a tax-free transfer, divide the IRA among them. Be prepared to put your instructions in writing for approval by the custodian’s legal department if its clerical staff initially says this can’t be done, adds Picker. It can be.
Each heir can reinvest his inherited IRA as he wishes. The owner died at 74, so their first required distribution is based on his life expectancy at 75, which is 13.4 years. For example, the first distribution for a $65,000 account is $4,851 — $65,000 divided by 13.4.
THE BOTTOM LINE An IRA left to an estate must be emptied faster than an IRA left to human beings.