REQUIRED DISTRIBUTION IRA

[TAXMAN]

TP single (84) already taking RMD. TP died Oct. 2015. IN banks paperwork the estate was named beneficiary. Administrator cashed out IRA's and put cash in the estate bank account. Can ADM. use the Sept 30 2016 date to name beneficiaries and pass these on as IRA's for the beneficiaries and set them up as IRA for the beneficiary?  The only Estate return being filed will be the 1041. Not sure I quite understand that this can be done since ADM already cashed them out. In addition what happens to the unused basis in the IRA's. Thanks for all the help.

[joanmcq]

Since estate was the beneficiary of the IRA, the beneficiaries of the estate don't have the option of setting up their own bene IRAs.  

Bad planning.

[fredazcpa]

very bad planning and also the adm should have consulted an attorney, it might have been possiable to get the benificaries the IRA but not now, have seen it done twice in the last few years and it was all dependent upon how the trust was worded, but once the trust cashed it in, it is over, big tax bill

 

[BHoffman]

Son is the sole beneficiary of his father's trust.  Dad passed.  Dad's IRA named the trust as the beneficiary.  Son took a total distribution and 10% was withheld for Fed taxes on the 1099R.  Is that entered to the Son's K-1 on Line 13 as code B "backup withholding?".  Never had an IRA named as beneficiary before......

[BHoffman]

Well, crap.  I just found the correct search terms and the interweb says NO.  The trust gets a refund of the withheld taxes.

No!  Wait! Now I see something different!  Would anyone know off the top of your head?

 

[jklcpa]

Yep, the trust will report the distribution from the IRA, and that is added in to the other income the trust might have to determine what income is ultimately distributed to the son.

There are many pitfalls to naming a trust as bene of an IRA.

[BHoffman]

I'm finding that out.  I've come to the conclusion that since the Son did take the distribution from the Trust, the back up withholding will be on his K-1 on line 13.  

I'm understanding that if the Son had left the IRA funds in the trust, the trust would have to file a tax return to receive any refund of the back up withholding.

I really hate trusts.  They are so twisty.

 

 

[BHoffman]

Wrapping this up.  The Trust was the beneficiary of Dad's IRA in the amount of approx $25k.  The Son is the only beneficiary of the Trust.  Dad died at age 69.

The Trust took a total distribution and passed it all to Son.

Is this subject to any 10%penalty to either the Trust or the Son?  I'm 99.99% sure the answer is no, but have never seen a trust named as a beneficiary to an IRA.

Who pays the tax on the IRA distribution, the Trust or the Son?  I'm hoping the Son.

10% was withheld for Fed tax on the 1099R.  Since the total proceeds were distributed to the Son, is it correct that the withholding is reported on his K1 and passed to him?

Thanks as always for any advice.  I've looked and looked and am coming up dry.  Much of the info I'm seeing assumes the beneficiary wants to keep the funds in the IRA, not take a total distribution.

[BHoffman]

I'll try to answer my own questions on a hot Sunday afternoon

Nobody pays penalties.

The Son pays the tax since the IRA distribution to the Trust and the Trust subsequent distribution to the Son happened in the same accounting year.

The Son gets to report the withheld tax on his 1040 since he received the total distribution received by the Trust.

OK?

Thanks and Happy Sunday!

 

 

[easytax]

I do NOT do or handle trusts so am asking for "knowledge" sake.

Are not the trust and the beneficiary two different entities?  If so, then the trust owing or doing any taxable things would be separate from the beneficiary? That they both happened in the same year does not negate the two occurrences being for different entities? The end result that goes to the beneficiary would be after trust does what the trust needs to do to "do the right thing"?

Again, I am curious and do not know if these are correct questions or not.    Either way, THANKS for information.

[Pacun]

I am glad you found your own answer.

It seems simple:

The trust received money and will need file its own taxes for that year. When filing, the trust will claim the 10% as money withheld and will also make a distribution and issue a K1 for the son (the beneficiary of the trust). The origin of the money the trust is distributing is irrelevant in this case to the son. The son will report his taxes as he does every year and will include the K1 on this taxes.

Keep in mind that the trust will have to file its tax return again next year because it will have money to distribute (the refund from the IRS, if any) and again the son will (most likely) get a K1 from the trust.

As for the penalty... you forgot a simple rule: The beneficiary of an IRA gets into the shoes of the dead. Meaning that if the dead was over 59.5 years old, no penalty.

[SaraEA]

Backup withholding can be passed through to the recipient of the income.  Regular withholding cannot--it is credited to the trust.  Since the amount withheld was 10%, and this is the amount IRAs withhold by default unless the payee tells them otherwise, I don't think you are dealing with backup withholding, which is mandated at 28%.  Sounds like this is regular withholding and the trust gets credit for the amount withheld (and the refund).

[BHoffman]

 

 

1 hour ago, Pacun said:

I am glad you found your own answer.

 

Well, I hope I did

Your post indicates that the Trust will report the backup withholding.  My understanding is that if the Trust distributes 100% of the IRA proceeds to the beneficiary in the same tax year it received the proceeds, then the backup withholding is passed through to the beneficiary on his K1 in box 13, code B.  Right?

The trust distributed 100% of the income it received - this IRA and $3k in rental income.  

So, does the trust have any income to report or any tax to pay?  Please say no

[SaraEA]

Answers to two more of BHoffman's questions.  The unused basis in the IRA passes to the trust, so the full amount will not be taxable.  Exceptions to the early distribution penalty include death (Code 4 on the 1099R).

[BHoffman]

21 minutes ago, SaraEA said:

Backup withholding can be passed through to the recipient of the income.  Regular withholding cannot--it is credited to the trust.  Since the amount withheld was 10%, and this is the amount IRAs withhold by default unless the payee tells them otherwise, I don't think you are dealing with backup withholding, which is mandated at 28%.  Sounds like this is regular withholding and the trust gets credit for the amount withheld (and the refund).

Thank you, SaraEA!  I have corrected this error.

If the decedent did not make any nondeductible contributions to his IRA, will the IRA have any basis?

[Abby Normal]

Tell the IRA company to not withhold any taxes in the future.

Beneficiary receives carryover basis from decedent on IRAs.

[Pacun]

Keep the rule simple: For IRAs, the beneficiary also inherits the shoes. So he/she puts on the shoes of the dead and everything is like before. If the dead was 59.5 or more years old, no penalty. If the dead had basis, the person wearing his/her shoes gets the basis.

Are we on agreement that the IRS received the money on the trust FEIN and the beneficiary of the trust can claim that withholding on his social security number?

 

[BHoffman]

3 hours ago, Pacun said:

Keep the rule simple: For IRAs, the beneficiary also inherits the shoes. So he/she puts on the shoes of the dead and everything is like before. If the dead was 59.5 or more years old, no penalty. If the dead had basis, the person wearing his/her shoes gets the basis.

Are we on agreement that the IRS received the money on the trust FEIN and the beneficiary of the trust can claim that withholding on his social security number?

 

The beneficiary can NOT claim the withholding on his social security number.  The Trust will file a return for a refund.  SaraEA pointed out that only backup withholding (required withholding) can pass through, not regular withholding that was requested and not required.

Thanks very much and I'm sure I will have more questions.  Trusts seem like an entirely different realm of tax preparation.  I have taken CPE Webinars, read the instructions, etc.  For some reason, it just doesn't sink in and I feel pretty dumb.

[Pacun]

Thank you. So, as I said, I think the trust will file for at least 2 years.

[BHoffman]

Yep.  The beneficiary's primary residence and a residential rental house is also in that trust. 

[SaraEA]

On 8/14/2016 at 8:18 PM, Pacun said:

the trust will have to file its tax return again next year because it will have money to distribute (the refund from the IRS, if any)

Maybe the trust will have to file a second year, but not for this reason.  An IRS refund is not income.  A trust must file a tax return if it has more than $600 in income, which might or might not be the case.  If the trust had no other income and is just distributing assets (the refund), no income tax return is required.

BHoffman, did you mean the DECEDENT'S primary residence and a residential rental house he owned were in the trust? If the beneficiary's own assets were in the trust mixed in with the decedent's, you have an ongoing trust and will file returns for many years.  And no, if there were no nondeductible contributions to that IRA, there is no basis (all contributions were pre-tax).   The whole thing is taxable.  Check if the decedent has been filing 8606s to report basis.

It seems to me as if this poor guy went to one of those dinner seminars and got suckered into forming a trust he didn't need.  From what you've said, he didn't have enough assets to justify protecting them in a trust (he may have had liability reasons).  I have witnessed this many times--unsuspecting people fork over a fortune to form a trust they don't need, then have to pay for trust returns every year.  I'm dealing with one right now where the decedent had a trust that expired on his death and all the assets were to be distributed to his son.  Son called me because the jerk who set up the trust years ago insists the assets must be distributed to a new trust set up for the son before they can be distributed.  Cost to set it up is $8500.  I told the client to call an attorney, who reviewed the trust document, called the jerk and told him to distribute the assets directly to son.  I'd report the jerk if I knew whom to report him to.

[BHoffman]

SaraEA,. thank you very much for your advice!  I think the beneficiary primary residence was owned by the decedent, as the mortgage 1098 comes to the decedent while the property is titled to the Trust.  I think I can report the interest in the Beneficiary Sch A.    

I have also seen people victimized by scam artists.  In AZ, the attorney general is the one who investigates these things.  If the scammer is an attorney, the State Bar Assn. might have some leverage.

The decedent was surely taken advantage of by making this trust.  He already had a will and his son was the sole heir.  He had an IRA worth approx $20k, a res. rental with a FMV on date of death of around $200k with a mortgage, and a house he lived in with his son and son's family for around $260k with a mortgage, and other debt.  The son is a new client, but seemed to believe that leaving the real estate in the trust would protect it from creditors.   We had to have a talk about that 

[SaraEA]

This sounds like a grantor trust, which was reported on Dad's return when he was alive.  At his death it became an irrevocable trust (which can also be a grantor trust, but not if the grantor is deceased).  You will have to read the trust document to be sure.  It sounds as if all Dad's property is  owned by the trust, so the trust gets the income and pays and claims the expenses (including mortgage interest).  The will does not override property titled to others.  In this case, the will says the son gets everything, but Dad didn't own anything, the trust did. 

There will be a problem if the trust doesn't have enough income from the rental property to pay mortgages, taxes, insurance, etc on both houses.  Son can pay them if he wants but will get no credit because he is not legally liable for these bills.  If he wants to protect assets from creditors, he should talk to an attorney, not you.  (They prefer to talk to their tax pro because we charge a whole lot less, but some things are out of our bailiwick.)  If the homes are distributed to him and the trust dissolved, he will treat expenses for his personal residence like everyone else--mortgage interest and taxes on Sch A.  He can put the rental into an LLC if he is concerned about liability.  Be careful not to give him legal advice.

[Pacun]

Sara, I thought you were going to touch about the step up basis at the time of death or 6 months later.

It might be a good idea to suggest to your client to keep records of the step up basis on the houses and depreciate accordingly if needed.

[BHoffman]

I have been riding this guy since our first meeting over a year ago to get the real estate appraised and out of that trust.  

I have to leave town tomorrow for a few weeks and would like to come back to this when I get back.  I'll be online, but won't have the trust doc.

Thanks very much for giving me the benefit of your experience!