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Discussion:Inherited IRA - still in trust after 13 years

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Discussion Forum Index --> Advanced Tax Questions --> Inherited IRA - still in trust after 13 years


Discussion Forum Index --> Tax Questions --> Inherited IRA - still in trust after 13 years

Marcilio (talk|edits) said:

28 March 2014
Client walked in with a bankers box full of documents. He is the trustee and executor of his sister's trust and estate. She died in 2001. No tax filings of any kind have been made (except perhaps an EIN). No distributions of any kind have been made either from the trust or the estate (combined total...~ $1,000,000). Sister had an IRA, with the trust as the beneficiary. Obviously the 5 year distribution deadline has come and gone. Oh yeah, my client ( her brother) is a lawyer, but obviously not a tax attorney.

My brain cramps up from overuse these days. Does anyone have a comment or two that can help me devise a strategy for resolving this mess?

Ckenefick (talk|edits) said:

28 March 2014
What are the estate/trust assets? And how much is the IRA?

Dennis (talk|edits) said:

28 March 2014
I believe it matter whether the IRA was in distribution.

Kevinh5 (talk|edits) said:

28 March 2014
start with the earliest year

Jrochestercpa (talk|edits) said:

29 March 2014
Start with a retainer.

Marcilio (talk|edits) said:

29 March 2014
It's interesting that we've been doing business with the lawyer/trustee for many years. He's a patent attorney & I think he's a bit right-brained. The IRA started at $400k & is now $800k. Non-IRA assets in the trust are about $200k. I don't have any trouble preparing 1041s for the first 5 years, but I haven't had the situation whereby required distributions haven't been made for 8 years. The beneficiary (husband of the decedent) knew he had the inheritance coming, but said he didn't need the money and just let it pass. Think about it, do you know of anyone who wouldn't want to put their hands on it as soon as they could?

I'm concerned about the 50% excess accumulation tax. That along with penalties and interest would basically cause the IRA to be confiscated by IRS. Of course, we'll have to present the case to IRS and ask for waivers, there has to be a grand plan, I'll welcome all suggestions.

Kevinh5 (talk|edits) said:

29 March 2014
Anwer Dennis' question, and then tell us the age of the husband at wife's death.

Ckenefick (talk|edits) said:

29 March 2014
First off, naming a trust as an IRA beneficiary can be loaded with problems, unless the trust is the conduit variety (as opposed to the accumulation variety). You can do a quick Google search on this issue and find out for yourself. The gist is that if the trust runs afoul of these rules, you won't get a stretch and you'll be stuck with the 5-year rule.

So, I think you need to figure out "what should have happened" and what the ramifications are for that "should have happened" not happening.

Just thinking out loud here, but if the balance should have been completely distributed at the end of the 5th year (and I'm not saying that's the case), then we'd be looking at a 50% penalty on that balance. Of course, I think we'd have income tax on future actual payouts as well.

Again, just thinking out loud, but if the bal was $500k at the end of the 5th year, the 50% penalty would be $250k. I believe interest would be charged along with late payment and late filing penalties (since 1041's were not filed). These charges would be substantial absent an abatement/waiver. I suspect the trust would be the one to pay it, with the result that the trust would have to draw from the IRA to pay it, creating taxable income, likely taxed at the trust level. Whatever is left in the IRA will be distributed at some point in time, resulting in more taxable income. I think we might end up with what amounts to a confiscation of substantially all of the balance. But, you need to figure it out precisely for a couple of reasons. First, so you can tell the client what he's looking at. And second, if you wheel and deal with the IRS, you will have some sense of the "fairness" of any settlement.

Now, maybe you have figured this out already, I'm not sure.

And again, a big part of this is whether or not the trust qualifies for a stretch. If it does, then annual RMD's might not have been awful and the 50% penalty each year might not be as drastic as a 1-time 50% at the end of the 5th Year. But then again, we've got lots of 5329's not filed for all these years, and no 1041's filed, so whatever the 50% penalty would have been for all these years, will have late payment, late filing and interest tacked on.

And, maybe it will turn out that the one-time 50% penalty is better than 13-years worth of smaller 50% penalties.

So, there's a lot of numbers to crunch here. You might not have to run it both ways: 5-year rule applies / 5-year rule does not apply. The 5-year rule either applies or doesn't apply. Of course, for shits and giggles, you might want to run it both ways.

You'll likely have to run the trust by an attorney, who is well versed with this IRA-as-a-Trust-Beneficiary issue, to get his or her opinion as to what should have happened, whether the Trust would have qualified for a stretch, etc.

And I will leave you with this: This is probably a situation where you work under an attorney and if client wants to make this right (and I'm not saying he will), attorney can go straight to IRS area counsel to work out a deal.

Kevinh5 (talk|edits) said:

29 March 2014
Chris, what authority can you cite that says that an attorney could go straight to the IRS Area Counsel to work out a deal.

Are you saying the rest of us could not do so if an attorney can?

I don't get it.

Ckenefick (talk|edits) said:

29 March 2014
What are you guys angling at: Trying to get a ruling to disregard the existence of the trust?

There's plenty of those in a marital setting, but not sure about this situation, wherein a surviving spouse wasn't even mentioned.

Ckenefick (talk|edits) said:

29 March 2014
Chris, what authority can you cite that says that an attorney could go straight to the IRS Area Counsel to work out a deal.

I bring up an attorney because of the privilege issue, where things can be done without divulging the identity of the client. Do note that in this case, client might say, "These penalties are staggering...I aint' doing it. I'll just leave the IRA intact and hope I never get caught. I'll just keep on doing what I'm already doing: Nothing."

Marcilio (talk|edits) said:

29 March 2014
These are good points. Of course we want to play Let's Make a Deal. The part I hadn't thought of is that the beneficiary of the trust is the surviving spouse. That means that if the trust and the beneficiary designations were set up properly the IRA could have gone to spousal IRA for him with no required distributions (I think). That might be the saving grace.

I still have a lot of work to do, and no time before 4/15, but this is a great start. Thanks all.

Ckenefick (talk|edits) said:

29 March 2014
The part I hadn't thought of is that the beneficiary of the trust is the surviving spouse.

There is a body of PLR's on this issue, where after death, everyone tries to get the trust undone, or in some other way, obtain rollover treatment.

http://wealthmanagement.com/retirement-planning/irs-grants-surviving-spouse-s-individual-retirement-account-rollover-request

This situation is not totally adding up to me, however.

Ckenefick (talk|edits) said:

29 March 2014
That means that if the trust and the beneficiary designations were set up properly the IRA could have gone to spousal IRA for him with no required distributions (I think).

Well, this gets back to Dennis' and K5's point. You obviously can't do a rollover if the named beneficiary is a trust, absent a PLR. But, as you state, IRA might not be in distribution mode yet. So, I think you might be out of the loop on some critical information here...hopefully.

Marcilio (talk|edits) said:

29 March 2014
The whole situation is messy. the dearth of documentation is perhaps the biggest hurdle. I do like complex situations, and this one may fit the bill.

Kevinh5 (talk|edits) said:

31 March 2014
you might like complex situations with a dearth of documentation, I prefer a dearth of vader

Ckenefick (talk|edits) said:

31 March 2014
Supposedly, Dearth Vader has lots of papers

Kevinh5 (talk|edits) said:

31 March 2014
but he, as all from the dark side, uses Turbo Tax

Ckenefick (talk|edits) said:

31 March 2014
When I used to work at a firm, I played this game with the new hires called "Turbo Tacks," just to see how fast they could run...

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