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  1. #1
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    Jun 2018
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    Default 1041 Pass Through Eligiblility for an Inherited IRA

    My question involves estate proceedings in the state of: New York. Hello, my brother passed away last October without a will and I was the closest next of kin and thus the sole beneficiary. I am also the appointed Administrator of the estate. There were 3 IRA's and a thrift saving plan totaling approx $40,000 that I liquidated and deposited into an estate account. My question is whether I am eligible to do a pass through of the proceeds on form 1041 and pay the tax on my own return. The IRA instructions say that mandatory distributions to beneficiaries are eligible for pass through but I can't find an explanation of what qualifies as "mandatory". I understand the tax rate on estates is quite high so I want to be able to take advantage of the lower personal rate.

  2. #2
    Join Date
    Jan 2006
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    38,867

    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    A mandatory distribution to a beneficiary is speaking of a named beneficiary on the 401k account itself. Otherwise it is simply a distribution by the estate. It is cash to you and has nothing to do with it being a 401k

  3. #3
    Join Date
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    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    Quote Quoting rgriffing
    View Post
    My question involves estate proceedings in the state of: New York. Hello, my brother passed away last October without a will and I was the closest next of kin and thus the sole beneficiary. I am also the appointed Administrator of the estate. There were 3 IRA's and a thrift saving plan totaling approx $40,000 that I liquidated and deposited into an estate account. My question is whether I am eligible to do a pass through of the proceeds on form 1041 and pay the tax on my own return. The IRA instructions say that mandatory distributions to beneficiaries are eligible for pass through but I can't find an explanation of what qualifies as "mandatory". I understand the tax rate on estates is quite high so I want to be able to take advantage of the lower personal rate.
    If you are the sole beneficiary to the estate you really made a big tax mistake by liquidating those IRA's rather than distributing them to yourself as rollovers.

    You need to get a tax professional involved to help you minimize the tax burden.

  4. #4
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    Jun 2018
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    Mount Dora, Florida
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    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    Maybe you misunderstood me. I was the sole beneficiary by default because I am the closest next of kin and there was no will. The IRA custodians issued the proceeds of the IRA's to the Estate and I did not have the ability to roll them over.

    I'm still unclear on this. Can I pass through a simple distribution on the 1041 to my individual return. In other words, does it have to be mandatory to qualify for pass-through treatment?

  5. #5
    Join Date
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    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    A mandatory distribution is an amount that the beneficiary of an IRA must withdraw in a given tax year. When a person must make a withdrawal from an IRA and passes away before doing so, the IRS is indicating that the mandatory distribution is eligible for pass through taxation. That's different than what you are describing, which is where the entire IRA is cashed out, but the effect is the same.

    The estate must report the IRA distribution as estate income. The distribution must occur in the same tax year in which the money is received by the estate.

    The IRA income, and thus the tax liability from the estate's 1041, may be passed through to the beneficiaries via a K1. The beneficiaries must report that income on their own tax returns, and pay the taxes.

    As the sole beneficiary, you should evaluate the tax burden both ways -- with the estate paying the taxes and with you paying the taxes via pass through taxation -- and pick the approach that minimizes your tax burden.

  6. #6
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    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    Thanks for the helpful advice. The Estate tax rate is nearly 40% for income over 12K so passing it through to my individual return is a no-brainer.

  7. #7
    Join Date
    Oct 2014
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    7,957

    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    Quote Quoting rgriffing
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    Thanks for the helpful advice. The Estate tax rate is nearly 40% for income over 12K so passing it through to my individual return is a no-brainer.
    In order to pass the income from the estate to you for federal tax purposes you need to ensure that the estate actually distibutes the money to you during the same tax year of the estate that the estate got the the money from the IRA trustee.

  8. #8
    Join Date
    Jun 2018
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    Mount Dora, Florida
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    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    Yes, but how do you document the distribution? I asked the credit union to move money from the Estate account to my personal account but how would the IRS know this?

  9. #9
    Join Date
    Oct 2006
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    Default Re: Administrator and Sole Beneficiary - 1041 Pass Through Eligiblility

    Quote Quoting rgriffing
    View Post
    Yes, but how do you document the distribution? I asked the credit union to move money from the Estate account to my personal account but how would the IRS know this?
    You have to issue a Schedule K1 with the estate tax return, passing the money through to your personal return. Again, you are going to want to get a tax professional on board. You do not want to make any mistakes.

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