An almost universal recommendation from financial advisers and tax attorneys is that an IRA should not have the owner's estate as the beneficiary. However, that advice is of little use if the IRA owner is already gone and the account is in fact in the hand's of the estate executor. It might still be possible to split the IRA, but to a great extent, you are at the mercy of the probate court and the IRA tax rules.
IRA rules allow the owner to name beneficiaries to receive the account when the owner dies. Naming real people as beneficiary allows the IRA to pass to the next owner without going through probate and gives the heirs more flexibility concerning withdrawals and paying taxes. If the estate is named as beneficiary or the account goes to the estate by default because no named beneficiaries are alive, the probate court has control of what happens to the account. Tax rules are skewed towards getting the IRA cashed out and income taxes paid on the proceeds.
Owner Over Age 70 1/2
If the owner of the now estate-owned IRA was over the required minimum distribution, or RMD, age of 70 1/2 at death, the tax rules require the estate to continue taking the RMD amounts each year and pay taxes on the withdrawals. Taking just the minimum distribution each year could keep the estate open for 10 or 15 years or longer, so it is possible that the probate court would push the executor of the estate to quickly cash out the IRA, pay the taxes and distribute the remaining money to the heirs.
Not Yet to RMDs
If the IRA owner was not at the RMD point in life when he passed away, the tax rules require that all the money in an estate-owned IRA be withdrawn and taxes paid within five years after the owner's death. Normally, the executor of the estate would cash in the IRA, pay the taxes and count the remaining cash as part of the estate to be divided among the heirs. It might be possible to ask the executor to petition the probate court to divide the IRA between heirs as inherited IRAs. If the court agrees, the custodian of the IRA must be willing to go along with the plan.
Taxes to Be Paid
Whether or not you can get the estate-held IRA transferred to you as a beneficiary IRA does not change the fact that the money must come out of the account within five years after the owner's death. When the withdrawals are made, either the estate or you as the beneficiary owner will pay income taxes on the money. You might want to discuss this issue with the executor of the estate or with a tax specialist to see which path leaves you with more cash in hand after the taxes have been paid. If the IRA is a Roth account, that type of IRA offers tax-free withdrawals, as long as the Roth IRA had been open for at least five years.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.