Advanced Underwriting Consultants

Ask the Experts – April 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is the executor of an estate, and the estate itself is the beneficiary of an IRA and a deferred annuity. How does an executor decide when and to whom to make distributions from these retirement accounts?

Answer: Since the estate is the beneficiary of the deferred annuity, the deferred annuity must be liquidated within 5 years from the original owner’s death. The same rule applies to the IRA if the deceased was younger than 70 ½ at her death. If older, the estate has the option to stretch distributions over the life expectancy of the deceased based on her age at her death using the single life table published by the IRS.

The executor should make sure these distribution rules are met to ensure that these two accounts aren’t hit with RMD penalties. Additionally, the estate is liable for income taxes on these distributions, and estates are typically taxed at higher rates than individuals.

The next step is getting the annuity and IRA funds from the estate to the estate’s beneficiaries. The executor must work with the probate court to figure out who receives what portion of these distributions. Once it’s determined, the executor can make the proper distributions.

On a related note, estates often incur various bills. The executor can seek permission from the probate court to apply estate funds to such bills.

This may seem troublesome and potentially costly, but it could have been avoided by not naming the estate as beneficiary of the deceased’s IRA and annuity. Keep in mind that this choice was made when the deceased named her estate as the beneficiary to her retirement accounts.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.