Legal Question in Investment Law in California

Re: IRA distributed to beneficiaries reinstated

I don't know the answer, and I'm on the road so I can't look it up right now. Ordinarily, under these circumstances, I'd have no business even attempting to answer....but at this point it looks like no one else is going to reply, and I do have a suggestion, so here goes:

First, this has to be a common problem, and one that even an IRS phone-assistance person should be competent to answer. Therefore, my advice is to call the IRS. To be safe, call them twice on two different days and see if you get the same answer.

However, my guess is that you will be told that the deferred tax liability on a decedent's IRA becomes due and payable when the heir cashes in the IRA, and is taxable at the heir's marginal tax rate after adding in the value of the IRA to the heir's other income - often pushing the heir into the top bracket.

I think they will also tell you that you can't un-ring the bell and reverse the cash-in.

What I'm less sure of is whether the heirs could have held the accounts un-cashed and deferred the tax. At any rate, IRAs do not get a stepped-up basis on death and there is a tax liability at some point.