My mother passed away in March of this year at the age of 74. She had 2 Traditional IRA's, each about $45,000. One was ITF for me and the other for my sister. She was taking required annual distributions (about 10%) already. They are both CD's earning about 6.5%.The bank is telling us we need to start taking distributions before Dec of this year, an accountant friend tells me he believes we dont have to start until Dec. of NEXT year.She has an estate tax number, I was wondering if the estate would receive the additional (over 65) tax benefit that my mom did and would we be better off keeping the money in her IRA as long as possible.Another problem is that one of the CD's matures on 12/18/01 and the other on 2/8/02. I dont want to let them renew at a 2.5 or 3% rate!Thanks
Before I answer your question, allow me to clarify what you've written. You said the IRA's were ITF you and your sister. Are the IRA's in a trust or is a trust being set up for you and the IRA will become a part of the trust? Or are you just the named benficiaries of the two IRA's? There is a tremendous difference if a trust is involved.I will assume that you are merely the beneficiary of the IRA and that no trust is associated with the IRA.First let me strongly urge you to seek profesional help in filing the proper forms with the proper cut off dates for your mother's final Form 1040 tax return and possible Form 1041 and Form 706. You may find a tax professional in your area by looking in www.naea.org or www.natptax.com. If you ask the preparer (not the receptionist) if he/she knows how to properly cut off the taxable income for your mother's accounts that were kept open after her death, and they say yes, you may have some assurance they know what they are doing. Many preparers are not familiar with preparing Form 1041. Make sure you ask if they are experienced with working on Form 1041 for a decendent's estate. If your mother's estate was worth over $675,000, please contact an attorney also, perhaps even a tax attorney. Also if she held any assets, like bank accounts or her home, in her name only, you will have to go to probate before you can sell those accounts. Since she died in March, you proabably are already aware of this. I mention it here for the benefit of anyone else who may be reading this.If your mother's estate included a residence, and it was sold or will be sold within a year of her death, the basis is stepped up to the selling price. The property will become investment property to you, considered held long term (as defined by tax law). If you pay a sales commission or other selling expenses, you will incur a capital loss which is flowed through to you and your sister. A nice little tax benefit. Makes sure the preparer of the tax return is aware of that.Under the newest tax law for IRA's for which the original owner was required to take distributions, you may now withdraw a newly calculated required distribtuion based on YOUR remaining estimated life. (IRS has it all figured out for you, so you don't have to guess!) If your mother had not taken the required distribtuion before she died, you will have to take a distribution this year.By continuing to withdraw only the minimum distribution (you could withdraw more if you'd like), you'll be keeping your tax liability down. I assume also this is your intention. When the 6.5% CD's mature, you may transfer the funds to another IRA. However the IRA MUST remain in your mother's name, with you as the named beneficiary. Your social security number will become the primary number. By the way this transfer must be a trustee to trustee transfer to avoid taxation on the entire sum. So don't withdraw any checks directly for any but the required minimum distribution.Since there were named beneficiaries, the IRA's do NOT have to be disbursed through the estate ID number. The IRA's value is a consideration for the value of her estate if the total estate value is over $675K. If there is an estate tax, you'll get a credit for the amount of tax paid on the IRA by the estate. Before the CD's mature, you and your sister should contact whomever it is that you want to be the administrator of your IRA, be it the bank, a broker or whomever. You should discuss the investing options that you will have to select from. Since the CD is paying 6.5%, I wouldn't consider transfering the funds until you have to. You should notify the bank that you will not be renewing the CD. In that short window of time that you'll have to withdraw and transfer, make sure either the new transfer agent has his paperwork done timely (your responsibility to follow through with this)or that the funds have been put into some sort of money market holding account still in your mother's name, with you or your sister named beneficiaries. Hopefully there is some knowledgeable person in the tax department of both the bank and your new trustee's office who understands this very tricky quirk in the new tax law. One slip up and you'll be taxed on the whole amount this year. I keep emphasizing this wording of the ownership of the IRA because I have one from my dad set up like this personally. I actually followed the transaction through the brokerage firm to make sure it was done properly. The tax department at Smith Barney knew the procedure, but my broker was uncertain and could have screwed the paperwork up if I hadn't been as watchful as I was. Since the bank where the CD is, will be transferring the money, they will also have to be advised that you have paperwork coming from another administrator. Again the people at the front desk that you will be dealing with may not know the law, even if their tax department does. The front desk person may be the one who has to initiate a temporary holding of the your funds if the paperwork from you new administrator doesn't come through timely. So all this bears watching.Insist on seeing the chart that is used to calculate the minimum distribution. Your age should be the determinig factor, not your mother's. Do this if you want to save the most tax.The friend's CPA who thought you had until next Dec to withdraw the funds is really not wrong. That is another option if you chose to pay the tax all at once on the IRA. I do not think that is your wish, however.Your mother passed in 2001, so she will have to file a final year tax return for 2001. She will be taxed only on the taxable income she received up to the date of her death reported on Form 1040.Any earnings after that date are either taxed to the estate or passed through to you and your sister. Form 1041 will be filed. The bank or other interest or dividend paying administrators have computers that do not or cannot split the interest and dividends paid on your mother's assets between those paid before her death and those after. This means you will have to split the amounts to accurrately prepare the returns.If you ask for a annual history of your mother's accounts, this information can be obtained so yu can do the correct split.I apologize for being so long, but this can be a very complicated return even if it seems simple. firstname.lastname@example.org
acm4tax, Thank you so much for your prompt reply, I really appreciate it!As a matter of fact, my Mom sold her house (or went to contract) JUST before she died. We were lucky enough that our attorney was smart enough to change the contract at closing so that her estate sold the house and my sister and I received the stepped up basis. I was not aware of the tax deduction for the brokers fee, thank you for pointing that out!Thanks again!
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