I am considering cashing out my share, which I know means I will owe taxes on this amount immediately. But here are my reasons for considering doing it anyway:
It's a little unclear from your OP as to whether this is literally an inherited IRA
(meaning an IRA in your name and under your own tax id) versus an IRA held in trust under the trust's tax id, which you and your sisters are the beneficiaries of. The distinction is critical.
You want to be
very careful in how (and possibly
when) you pull money out of an IRA held in a trust. And certainly how you account for that during tax-time. That trust is a separate legal entity having a different tax id than your mother's social security number (called an EIN for legal entities).
This link shows tax brackets for individuals, estates, and trusts.
https://www.edwardjones.com/images/OPR-9806B-A-2018-federal-tax-brackets.pdfLook on the first page, at the tax brackets for estates and trusts. They are taxed at the top marginal rate (currently an astounding 37%) after the first
$12,500 of taxable income. A single individual needs to be earning over
$500K in order to be taxed at that rate. Let that sink in for a minute. That's not a type-o. You can thank Obama for the little tweak to the tax code that compressed the tax brackets for estates and trusts.
That means ~105K goes, 'poof', right to the feds, assuming a ~285K IRA (not counting what your state will swoop in for), if you liquidate and allow the trust to be taxed. That's before the beneficiaries see even a penny. Sure, it will be a tax-free distribution by the time they see those pennies, but only after the trust suffers the biggest tax-bite possible.
Don't confuse your situation with the term 'Estate Tax' that the republicans are always thumping the table about. That scheme only kicks in for multi-millionaires, and is even more brutal, if you can believe it, than what us little folks pay when leaving estates and trusts behind. That 37% rate is a gift compared to how your trust would be taxed if your mother was
really rich.I was my late uncle's executor and trustee, but I retained an attorney to guide me through the legal land mines. I asked him how I could liquidate my uncle's IRA, distribute it to the beneficiaries, and have them pay the tax at their own much lower rates, rather than have the trust taxed at the confiscatory 37% rate.
The answer came back that I had to act fast. I needed to finish probate within the 1st fiscal year of the estate (ending exactly 12 months after the month my uncle passed), get the assets transferred from the estate to the trust, and then distribute the full benefits to all the beneficiaries,
before (and this was key) the end of the first fiscal year of the trust. All of which I was able to do.
Then I hired a tax accountant to file a K1 form for the estate so that the estate's tax liability would be transferred to the trust, and then had them file a K1 for each of the beneficiaries, which then transferred the trust's taxable income to the beneficiaries, to be taxed at a their own much lower rate. Two of the beneficiaries were charities, so they paid no tax at all. But I still had to file K1s for them to move the taxable income out of the trust for their portions.
I don't honestly know if there was some other option if I had taken longer than 12 months to wrap up. As trustee you'll need to file tax returns for the trust every fiscal year that it exists. It's not just your ongoing effort you need to consider. You might have a limited window to figure out how to avoid that brutal tax bracket.
If the IRA is held in a trust, you might not have the option of withdrawing whatever your want whenever you want to, without possibly incurring some pretty severe tax consequences, or the risk of running afoul of your state's probate laws. According to my information, a successor trustee cannot "split" an IRA held in trust into multiple individual IRAs for the beneficiaries.
I would definitely get some advice from a professional before I made any decision. And I would certainly not delay in getting that professional advice. A viciously important clock might well be ticking down right now.
Taking a one-year tax hit at your own tax rate seems brutal, on the surface, but compared to the 37% rate the trust would otherwise pay, it seems like a walk in the park by comparison. It might actually be the right way to go.
Having said all that, if you decide to stick to an RMD-only method of distributing to the beneficiaries, that's the most tax-efficient way to go. But you'll have to sign-up for a multi-year job as trustee for who knows how long. Bear in mind that H&R block will charge you much more for filing a K1 than for a return. Multiply that by three (one K1 one for you and one K1 for each of your sisters), plus the cost of filing a return for the trust each year. That will be an annual additional cost born by the trust, for as long as you keep the trust open, chipping away at the amount remaining for the beneficiaries as time goes by.
But if you also want to think about having it available as an emergency fund (for you or any of the beneficiaries), you are heading out into treacherous waters. And not just from a taxation perspective. If I ever pulled out any money from my uncle's trust for any of the beneficiaries, without making equal distributions to the other beneficiaries at the same time, I would be in violation of my state's probate laws, and could have easily been removed as an unfit fiduciary if ever challenged.
There's some dangerous ground to cross if your mother didn't set up separate accounts for the beneficiaries under their own tax ids. I would definitely get professional advice. It might seem expensive, but it will be a lot cheaper than getting the tax game wrong.
As the fiduciary, the IRS can come after you, personally, for any taxes due not paid by the trust. It's critical to get that game done correctly.
Personally, I would get some face-time with a probate attorney. My attorney was the one who understood, explained, and guided me through the K1 strategy. My tax accountant (H&R block, chosen in honor of my uncle's life-long choice of tax accountant) was just one of the tools I used to implement the strategy. Only very few H&R block reps even knows how to file a K1 for a client. I had to drive over 100 miles away in order to get a rep who was available in time to meet my fiscal deadlines.