IRA Beneficiary & Estate Question

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defscott627
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IRA Beneficiary & Estate Question

Post by defscott627 »

My mother, aunt, and uncle are all beneficiaries to their uncle's estate. Most accounts were put in a trust, and most of his IRAs had a beneficiary. However, there is one IRA that they were not listed on as beneficiaries (it had no beneficiaries). They didn't want to liquidate this IRA because of the tax implications. However, the estate specialist at Charles Schwab, the provider of the aforementioned IRA, is saying:

"Unfortunately you do not have the option to do that [he is referring to opening three inherited IRA accounts] because no beneficiaries were named. Had the 3 of you been named then that’s exactly what we would do. That’s why it must go to an estate beneficiary when no one is named and then the executor distributes according to the will. The estate would be taxed for the distributions not the individuals you distribute the cash to in this case."

Is this true? They have no other option except to liquidate this IRA (approximately $5-600k)? Does that mean it will essentially be taxed at 39.6%? Also, if it matters, although they're not listed as beneficiaries on the IRA, he does have a will listing them as the beneficiaries of his estate.
Lee_WSP
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Re: IRA Beneficiary & Estate Question

Post by Lee_WSP »

The executor should be able to split the IRA three ways and each beneficiary may open an inherited IRA and distribute it over the 10 5 year period.

Here's what Charles Schwab posts about it:

https://www.schwab.com/ira/inherited-ira

https://www.schwab.com/resource-center/ ... ur-options

https://www.schwab.com/ira/inherited-ir ... awal-rules
Last edited by Lee_WSP on Tue Apr 06, 2021 3:17 pm, edited 1 time in total.
Topic Author
defscott627
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Re: IRA Beneficiary & Estate Question

Post by defscott627 »

Lee_WSP wrote: Tue Apr 06, 2021 12:37 pm The executor should be able to split the IRA three ways and each beneficiary may open an inherited IRA and distribute it over the 10 year period if not an EDB.

Here's what Charles Schwab posts about it:

https://www.schwab.com/ira/inherited-ira

https://www.schwab.com/resource-center/ ... ur-options

https://www.schwab.com/ira/inherited-ir ... awal-rules
Is that true? One of the sites you posted says:

What about those who are not listed as a designated beneficiary?
Some people end up inheriting a retirement account through an estate. In these situations, the distribution method used will generally follow the old rules from before the SECURE Act. In general one of the following methods must be used to distribute the assets…

Disclaim the inherited retirement account
Take a lump sum distribution
Distribute the assets within 5 years (there is no annual RMD requirement). This method is used when the original account owner died before their RMD age.
Take RMDs based on the original account owner’s life expectancy. This method is used when the original account owner died after their RMD age.
bsteiner
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Re: IRA Beneficiary & Estate Question

Post by bsteiner »

defscott627 wrote: Tue Apr 06, 2021 12:48 pm ...
What about those who are not listed as a designated beneficiary?

Some people end up inheriting a retirement account through an estate. In these situations, the distribution method used will generally follow the old rules from before the SECURE Act. In general one of the following methods must be used to distribute the assets…

Disclaim the inherited retirement account
Take a lump sum distribution
Distribute the assets within 5 years (there is no annual RMD requirement). This method is used when the original account owner died before their RMD age.
Take RMDs based on the original account owner’s life expectancy. This method is used when the original account owner died after their RMD age.[/i]
That's basically correct. If the IRA is payable to the estate, (i) if the IRA owner reached his/her required beginning date, it's payable over his/her remaining life expectancy as if he/she hadn't died, or (ii) if the IRA owner died before reaching his/her required beginning date, it has to be fully distributed by the end of the fifth calendar year following the IRA owner's death.

The executors may make distributions. Or the estate may distribute the inherited IRA to the beneficiaries in kind, though that won't change the distribution requirements.

The executors will take into account the estate's other income and deductions, and the estate's and the beneficiaries' tax brackets.

The lawyer handling the estate should advise the executors how best to deal with this.
Lee_WSP
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Re: IRA Beneficiary & Estate Question

Post by Lee_WSP »

Best to check with the provider/attorney to see if you qualify as a designated beneficiary.
Last edited by Lee_WSP on Tue Apr 06, 2021 1:01 pm, edited 1 time in total.
Topic Author
defscott627
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Re: IRA Beneficiary & Estate Question

Post by defscott627 »

bsteiner wrote: Tue Apr 06, 2021 12:57 pm
defscott627 wrote: Tue Apr 06, 2021 12:48 pm ...
What about those who are not listed as a designated beneficiary?

Some people end up inheriting a retirement account through an estate. In these situations, the distribution method used will generally follow the old rules from before the SECURE Act. In general one of the following methods must be used to distribute the assets…

Disclaim the inherited retirement account
Take a lump sum distribution
Distribute the assets within 5 years (there is no annual RMD requirement). This method is used when the original account owner died before their RMD age.
Take RMDs based on the original account owner’s life expectancy. This method is used when the original account owner died after their RMD age.[/i]
That's basically correct. If the IRA is payable to the estate, (i) if the IRA owner reached his/her required beginning date, it's payable over his/her remaining life expectancy as if he/she hadn't died, or (ii) if the IRA owner died before reaching his/her required beginning date, it has to be fully distributed by the end of the fifth calendar year following the IRA owner's death.

The executors may make distributions. Or the estate may distribute the inherited IRA to the beneficiaries in kind, though that won't change the distribution requirements.

The executors will take into account the estate's other income and deductions, and the estate's and the beneficiaries' tax brackets.

The lawyer handling the estate should advise the executors how best to deal with this.
What happens if the IRA owner was 91? He died after the RMD age, and I am assuming after any life expectancy age?
sailaway
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Re: IRA Beneficiary & Estate Question

Post by sailaway »

defscott627 wrote: Tue Apr 06, 2021 1:01 pm
bsteiner wrote: Tue Apr 06, 2021 12:57 pm
defscott627 wrote: Tue Apr 06, 2021 12:48 pm ...
What about those who are not listed as a designated beneficiary?

Some people end up inheriting a retirement account through an estate. In these situations, the distribution method used will generally follow the old rules from before the SECURE Act. In general one of the following methods must be used to distribute the assets…

Disclaim the inherited retirement account
Take a lump sum distribution
Distribute the assets within 5 years (there is no annual RMD requirement). This method is used when the original account owner died before their RMD age.
Take RMDs based on the original account owner’s life expectancy. This method is used when the original account owner died after their RMD age.[/i]
That's basically correct. If the IRA is payable to the estate, (i) if the IRA owner reached his/her required beginning date, it's payable over his/her remaining life expectancy as if he/she hadn't died, or (ii) if the IRA owner died before reaching his/her required beginning date, it has to be fully distributed by the end of the fifth calendar year following the IRA owner's death.

The executors may make distributions. Or the estate may distribute the inherited IRA to the beneficiaries in kind, though that won't change the distribution requirements.

The executors will take into account the estate's other income and deductions, and the estate's and the beneficiaries' tax brackets.

The lawyer handling the estate should advise the executors how best to deal with this.
What happens if the IRA owner was 91? He died after the RMD age, and I am assuming after any life expectancy age?
The current tables go up to 120.
Topic Author
defscott627
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Re: IRA Beneficiary & Estate Question

Post by defscott627 »

sailaway wrote: Tue Apr 06, 2021 1:05 pm
defscott627 wrote: Tue Apr 06, 2021 1:01 pm
bsteiner wrote: Tue Apr 06, 2021 12:57 pm
defscott627 wrote: Tue Apr 06, 2021 12:48 pm ...
What about those who are not listed as a designated beneficiary?

Some people end up inheriting a retirement account through an estate. In these situations, the distribution method used will generally follow the old rules from before the SECURE Act. In general one of the following methods must be used to distribute the assets…

Disclaim the inherited retirement account
Take a lump sum distribution
Distribute the assets within 5 years (there is no annual RMD requirement). This method is used when the original account owner died before their RMD age.
Take RMDs based on the original account owner’s life expectancy. This method is used when the original account owner died after their RMD age.[/i]
That's basically correct. If the IRA is payable to the estate, (i) if the IRA owner reached his/her required beginning date, it's payable over his/her remaining life expectancy as if he/she hadn't died, or (ii) if the IRA owner died before reaching his/her required beginning date, it has to be fully distributed by the end of the fifth calendar year following the IRA owner's death.

The executors may make distributions. Or the estate may distribute the inherited IRA to the beneficiaries in kind, though that won't change the distribution requirements.

The executors will take into account the estate's other income and deductions, and the estate's and the beneficiaries' tax brackets.

The lawyer handling the estate should advise the executors how best to deal with this.
What happens if the IRA owner was 91? He died after the RMD age, and I am assuming after any life expectancy age?
The current tables go up to 120.
So if he died January 2021 at 91 years old, how do I figure out whether it has to be fully distributed by the end of the fifth calendar year or whether we have the remaining life expectancy? Also, from what I'm reading, the estate would be taxed at 39.6%. Surely transferring the inherited estate IRA to each beneficiary in-kind and have them do the distributions seems much more tax economical, no?
Alan S.
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Re: IRA Beneficiary & Estate Question

Post by Alan S. »

defscott627 wrote: Tue Apr 06, 2021 12:20 pm My mother, aunt, and uncle are all beneficiaries to their uncle's estate. Most accounts were put in a trust, and most of his IRAs had a beneficiary. However, there is one IRA that they were not listed on as beneficiaries (it had no beneficiaries). They didn't want to liquidate this IRA because of the tax implications. However, the estate specialist at Charles Schwab, the provider of the aforementioned IRA, is saying:

"Unfortunately you do not have the option to do that [he is referring to opening three inherited IRA accounts] because no beneficiaries were named. Had the 3 of you been named then that’s exactly what we would do. That’s why it must go to an estate beneficiary when no one is named and then the executor distributes according to the will. The estate would be taxed for the distributions not the individuals you distribute the cash to in this case."

Is this true? They have no other option except to liquidate this IRA (approximately $5-600k)? Does that mean it will essentially be taxed at 39.6%? Also, if it matters, although they're not listed as beneficiaries on the IRA, he does have a will listing them as the beneficiaries of his estate.
For the estate inherited IRA, the Schwab specialist is overlooking the fact that the executor is generally able to assign the inherited IRA out of the estate to the will beneficiaries. This is typically done without a large delay unless the will is not clear. Assuming uncle passed after RBD, the IRA distribution period is the remaining single LE of uncle. Assignment to the individual will beneficiaries will enable each to control the inherited IRA investments and report RMDs on the individual returns at their individual tax rates. If uncle passed at 85, the IRA would last another 6-7 years.

The Secure Act had no effect on non designated beneficiary RMDs such as an estate or NQ trust. Some custodian still resist assignment of retirement accounts out of the estate, and if they cannot be convinced to cooperate, the executor would have to seek out another custodian to accept a direct transfer of the inherited IRA. IRA custodians are not thrilled about inherited IRAs of an estate since they can get embroiled into estate disputes.
bsteiner
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Re: IRA Beneficiary & Estate Question

Post by bsteiner »

defscott627 wrote: Tue Apr 06, 2021 1:23 pm ...
So if he died January 2021 at 91 years old, how do I figure out whether it has to be fully distributed by the end of the fifth calendar year or whether we have the remaining life expectancy? Also, from what I'm reading, the estate would be taxed at 39.6%. Surely transferring the inherited estate IRA to each beneficiary in-kind and have them do the distributions seems much more tax economical, no?
91 is after the required beginning date.

It may or may not be worth the effort to distribute the inherited IRA in kind. Life expectancy isn't very long at 91, and keeping it in the estate avoids having to deal with the custodian to distribute it. It also gives the estate income to use against administration expense deductions. Estates can use a fiscal year which may help. If the estate is in a higher bracket than the beneficiaries, the executors may make distributions which will carry out income.

Where is the lawyer handling the estate administration? He/she should be coordinating this.
Topic Author
defscott627
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Re: IRA Beneficiary & Estate Question

Post by defscott627 »

bsteiner wrote: Tue Apr 06, 2021 1:59 pm
defscott627 wrote: Tue Apr 06, 2021 1:23 pm ...
So if he died January 2021 at 91 years old, how do I figure out whether it has to be fully distributed by the end of the fifth calendar year or whether we have the remaining life expectancy? Also, from what I'm reading, the estate would be taxed at 39.6%. Surely transferring the inherited estate IRA to each beneficiary in-kind and have them do the distributions seems much more tax economical, no?
91 is after the required beginning date.

It may or may not be worth the effort to distribute the inherited IRA in kind. Life expectancy isn't very long at 91, and keeping it in the estate avoids having to deal with the custodian to distribute it. It also gives the estate income to use against administration expense deductions. Estates can use a fiscal year which may help. If the estate is in a higher bracket than the beneficiaries, the executors may make distributions which will carry out income.

Where is the lawyer handling the estate administration? He/she should be coordinating this.
Am I reading incorrectly that any amount over $12,500 is taxed (in an estate) as 39.6%? The IRA has about 500k in it. The three beneficiaries most definitely do not have personal income tax rates anywhere near 39.6%.
Gill
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Re: IRA Beneficiary & Estate Question

Post by Gill »

defscott627 wrote: Tue Apr 06, 2021 2:04 pm Am I reading incorrectly that any amount over $12,500 is taxed (in an estate) as 39.6%? The IRA has about 500k in it. The three beneficiaries most definitely do not have personal income tax rates anywhere near 39.6%.
You're not digesting fully what bsteiner and AlanS have told you. Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries. As bsteiner has repeated, isn't the attorney for the estate advising you on this? The attorney should be advising you, although I realize not all attorneys fully understand these matters.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
defscott627
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Re: IRA Beneficiary & Estate Question

Post by defscott627 »

Gill wrote: Tue Apr 06, 2021 2:13 pm
defscott627 wrote: Tue Apr 06, 2021 2:04 pm Am I reading incorrectly that any amount over $12,500 is taxed (in an estate) as 39.6%? The IRA has about 500k in it. The three beneficiaries most definitely do not have personal income tax rates anywhere near 39.6%.
You're not digesting fully what bsteiner and AlanS have told you. Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries. As bsteiner has repeated, isn't the attorney for the estate advising you on this? The attorney should be advising you, although I realize not all attorneys fully understand these matters.
The attorney basically says to ask our personal accountant, and the accountant basically says to ask the estate attorney, and the advice we are receiving is quite confusing and sometimes contradictory.

I think I'm not digesting fully because I'm not understanding fully lol. I apologize in advance, but if possible could you re-explain "Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries."

I understand that there will be an inherited IRA with the Estate as the beneficiary. I understand there is an option to liquidate the entire account at once and distribute three checks to the beneficiaries, but that the Estate will pay income taxes at the estate tax rate. I also understand I have the option of keeping the estate open for a certain number of years (depending on the life expectancy of the deceased) and money could be distributed to each beneficiary each year over that period of time. The part I don't understand is when you say the distributions will carry this income out to beneficiaries?
increment
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Re: IRA Beneficiary & Estate Question

Post by increment »

defscott627 wrote: Wed Apr 07, 2021 7:36 am [...] money could be distributed to each beneficiary each year over that period of time. The part I don't understand is when you say the distributions will carry this income out to beneficiaries?
If things are done correctly, the responsibility to pay tax can go along with that money. Your professionals can advise on whether this can be done, and the details.

The estate's tax return would then generate paperwork saying, "there was $X of income; $Y and $Z were distributed," and the net taxable income would be $X - $Y - $Z.

Also the estate would send paperwork to beneficiaries saying, "$Y (or $Z) was distributed as income taxable to you."
Lee_WSP
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Re: IRA Beneficiary & Estate Question

Post by Lee_WSP »

defscott627 wrote: Wed Apr 07, 2021 7:36 am The attorney basically says to ask our personal accountant, and the accountant basically says to ask the estate attorney, and the advice we are receiving is quite confusing and sometimes contradictory.
....
I understand that there will be an inherited IRA with the Estate as the beneficiary. I understand there is an option to liquidate the entire account at once and distribute three checks to the beneficiaries, but that the Estate will pay income taxes at the estate tax rate. I also understand I have the option of keeping the estate open for a certain number of years (depending on the life expectancy of the deceased) and money could be distributed to each beneficiary each year over that period of time. The part I don't understand is when you say the distributions will carry this income out to beneficiaries?
I'm not surprised. It's not a widely studied area of the law, even amongst lawyers who practice in probate law. It's also extremely detailed and confusing at times.

It's probably going to be cheaper to find an accountant/CPA who specializes in retirement accounts to figure out a plan for your specific situation.

Some facts for you though:
Given the three way split and size of the IRA, it's probably going to be most tax efficient to try and stretch the payments out as long as possible. Unless you are already in the highest bracket.

It is usually preferable to be able to direct your own choices, hence taking control from the executor would be preferable.

The tax implications of a single distribution to the estate instead of you individually has been answered above.

Some resources:

Life expectancy table: http://www.jimhelps.com/wp-content/uplo ... le-v.2.pdf

Looks like a 91 year old has a life expectancy of 5.1 years left

Inherited IRA application from Schwab: https://www.schwab.com/public/file/P-3719019

Any further instructions on how to accomplish the transfer is probably best posed to Schwab's retirement benefits team who are trained to deal with this exact issue (transferring the IRA from the estate to new beneficiaries).
trueblueky
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Re: IRA Beneficiary & Estate Question

Post by trueblueky »

defscott627 wrote: Wed Apr 07, 2021 7:36 am
Gill wrote: Tue Apr 06, 2021 2:13 pm
defscott627 wrote: Tue Apr 06, 2021 2:04 pm Am I reading incorrectly that any amount over $12,500 is taxed (in an estate) as 39.6%? The IRA has about 500k in it. The three beneficiaries most definitely do not have personal income tax rates anywhere near 39.6%.
You're not digesting fully what bsteiner and AlanS have told you. Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries. As bsteiner has repeated, isn't the attorney for the estate advising you on this? The attorney should be advising you, although I realize not all attorneys fully understand these matters.
The attorney basically says to ask our personal accountant, and the accountant basically says to ask the estate attorney, and the advice we are receiving is quite confusing and sometimes contradictory.

I think I'm not digesting fully because I'm not understanding fully lol. I apologize in advance, but if possible could you re-explain "Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries."

I understand that there will be an inherited IRA with the Estate as the beneficiary. I understand there is an option to liquidate the entire account at once and distribute three checks to the beneficiaries, but that the Estate will pay income taxes at the estate tax rate. I also understand I have the option of keeping the estate open for a certain number of years (depending on the life expectancy of the deceased) and money could be distributed to each beneficiary each year over that period of time. The part I don't understand is when you say the distributions will carry this income out to beneficiaries?
The estate files Form 1041 as its income tax return. If it distributes money from its income to the heirs, that reduces the estate's taxable income. The 1041 uses K-1s to show the distribution to the heirs. (Heirs show that income on their 1040s.) Additionally, 1041 is where the estate deducts certain associated costs (20 copies of death certificate, legal and accountant fees, legal notice in newspaper, etc.)

In most cases, the goal should be for the estate to have zero taxable income.
Katietsu
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Re: IRA Beneficiary & Estate Question

Post by Katietsu »

defscott627 wrote: Wed Apr 07, 2021 7:36 am
Gill wrote: Tue Apr 06, 2021 2:13 pm
defscott627 wrote: Tue Apr 06, 2021 2:04 pm Am I reading incorrectly that any amount over $12,500 is taxed (in an estate) as 39.6%? The IRA has about 500k in it. The three beneficiaries most definitely do not have personal income tax rates anywhere near 39.6%.
You're not digesting fully what bsteiner and AlanS have told you. Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries. As bsteiner has repeated, isn't the attorney for the estate advising you on this? The attorney should be advising you, although I realize not all attorneys fully understand these matters.
The attorney basically says to ask our personal accountant, and the accountant basically says to ask the estate attorney, and the advice we are receiving is quite confusing and sometimes contradictory.

I think I'm not digesting fully because I'm not understanding fully lol. I apologize in advance, but if possible could you re-explain "Distributions from the estate will carry this income out to the beneficiaries. This plus the use of administration expenses against the income will avoid these distributions being taxed to the estate but rather to the beneficiaries."

I understand that there will be an inherited IRA with the Estate as the beneficiary. I understand there is an option to liquidate the entire account at once and distribute three checks to the beneficiaries, but that the Estate will pay income taxes at the estate tax rate. I also understand I have the option of keeping the estate open for a certain number of years (depending on the life expectancy of the deceased) and money could be distributed to each beneficiary each year over that period of time. The part I don't understand is when you say the distributions will carry this income out to beneficiaries?
The bold part is the part you do not understand. That is true only if the money stays inside the estate.

I will give a simpler example. There is an estate with only a savings account in it. The savings account had $20,000 of interest in 2020. There is only one beneficiary to the estate. The estate had no expenses in 2020.

Scenario 1:
The interest was still in the estate account going into 2021. The estate will pay taxes at the estate tax rate. Some will be taxed at 37% with an effective tax rate around 27.5%.

Scenario 2: The $20000 is distributed to to sole beneficiary in December of 2020. The estate reports the $20,000 of income on the estate tax return BUT subtracts the $20,000 of the distribution. The estate pays no tax. The estate issues the beneficiary a K-1 form. The beneficiary must report the $20,000 of interest on their own tax return just as if the interest was received from a bank account in the name of the beneficiary. The tax rate on this income will depend on the tax rate of the beneficiary.


So, the taxable income of the beneficiaries is important in understanding possible tax implications. For instance, a married beneficiary with a personal taxable income of $180,000 is going to pay 24% federal tax whether the distribution is over 5 years or two years. So if I were that person, I would probably just want the estate to take the IRA and distribute $100,000 to me in 2021 and the rest in 2022. Easier for me and the same taxes. But this might not be the best choice for someone with a different taxable income.
Gill
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Re: IRA Beneficiary & Estate Question

Post by Gill »

Katietsu wrote: Wed Apr 07, 2021 10:50 am
I will give a simpler example. There is an estate with only a savings account in it. The savings account had $20,000 of interest in 2020. There is only one beneficiary to the estate. The estate had no expenses in 2020.
That is one heck of a savings account. At .05% that would be a $4 million account invested for a full year. :happy
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Katietsu
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Re: IRA Beneficiary & Estate Question

Post by Katietsu »

Gill wrote: Thu Apr 08, 2021 7:28 am
Katietsu wrote: Wed Apr 07, 2021 10:50 am
I will give a simpler example. There is an estate with only a savings account in it. The savings account had $20,000 of interest in 2020. There is only one beneficiary to the estate. The estate had no expenses in 2020.
That is one heck of a savings account. At .05% that would be a $4 million account invested for a full year. :happy
Gill
😀Yeah..I thought about as I wrote it. But decide def to stick with the simplicity of the example and hope no one noticed. Not a realistic hope on the BH forum!
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