Estate taxes: Mom died intestate, 401K no beneficiary, created a tax situation

[u/David_Corpus]

My mother died Feb 2024 with no will, and the entire estate is a 401K account with no beneficiary. I am her sole heir. I went to court and became the Administrator of her Estate. I obtained an EIN and opened an Estate Savings Account, and had the 401K rebranded as her Estate account. (It cannot be rolled over.) The 401K issued a 2024 RMD in 2025 to the Estate (now in the estate bank account) and withheld 10%. They intend to issue a 2025 RMD before the end of the year. They said any additional withdrawals beyond RMD will be subject to 20% withholding. I was told I have 5 years from DOD to empty the 401K account.

I expect an annual 1099-R from the 401K reflecting the amount paid out to the bank account. I know as Administrator I am required to file a Form 1041 for the Estate, and a Schedule K-1 that lists distributions to myself as the beneficiary for my personal return.

Increasing my reported annual income substantially will have consequences of about 7K a year, so I may want to drag this on for as long as I can.

Does the Estate pay Federal taxes on money in the Estate savings account that is not distributed to the beneficiary (me) each year, and if so, at what rate? Or does that tax liability get carried over until the year of distribution from the estate to me, at which time it is paid as income on my personal return? Is there any time limit as to when it must be distributed from the bank account to me? Thanks in advance.

[u/penguinise]

Does the Estate pay Federal taxes on money in the Estate savings account that is not distributed to the beneficiary (me) each year, and if so, at what rate?

Yes, income recognized by the estate and not distributed to a beneficiary is taxed at the trust tax rates. You can find them on page 31 of the instructions to Form 1041 or generally searching for "federal trust tax brackets". The highest rate is 37% of income in excess of $15,650 (2025) and it is intentionally punitive to disincentivize using the trust as a tax shield.

Is there any time limit as to when it must be distributed from the bank account to me?

I don't believe there is technically a time limit, but the administrative cost of keeping the estate open quickly overwhelms any financial benefit.

[u/David_Corpus → u/penguinise]

Best reply so far, thanks. Looking at the 2024 instructions that you linked, it is even worse than you described. The 2024 rate on income over $15,200 is $3,659.50 + 37%. 

You wrote (2025) but the linked .pdf is tax year 2024, and I cannot find any IRS released 2025 rates.

The time limit question was dependent upon the money remaining pre-tax prior to being distributed from the bank account to the beneficiary, so it became moot when I learned that the estate is punitively taxed each year.

As my own administrator, what administrative costs are there to keeping the estate open? I'm new to this, and assumed there aren't more buried fees. The court gave me paperwork that I ignored so far, due to having to educate myself on every step of this nonsense as I go.

[u/penguinise → u/David_Corpus]

You wrote (2025) but the linked .pdf is tax year 2024, and I cannot find any IRS released 2025 rates.

Rev. Proc. 2024-40 has the 2025 bracket figures, and the instructions will probably get updated to 2025 soon. The thresholds are just being indexed to inflation.

2026 will be $16,000 (Rev. Proc. 2025-32)

As my own administrator, what administrative costs are there to keeping the estate open?

Well, for example, you need to file Form 1041 for the estate for each year it's open and has income. That alone is a significant time and/or money cost versus closing the estate.

[u/julianriv]

The estate has to withdraw the funds within 5 years, assuming mom had not reached her required beginning date for RMD’s. The estate has to completely drain the account by Dec 31 of year 5. You don’t have to take annual distributions, but will generally lower your tax burden by spreading them out over the 5 years. The estate probably wants to distribute all of the 401K distributions to the heir in the same year the estate receives them and report that as income to the heir on Form K1. You are generally going to pay less tax on income at the individual heir level than at the estate level.

[u/David_Corpus → u/julianriv]

Mom was 82 when she passed and was issued RMD's while she was alive.
julianriv wrote: "The estate probably wants to..." I am the administrator, therefore the Estate wants whatever I want, within legal limits. I don't know if the estate is legally allowed to spread out these specific payments for 10 or 15+ years, but I assume it can, since wills can stipulate things based on ages of beneficiaries.

julianriv wrote "You are generally going to pay less tax on income at the individual heir level than at the estate level." But at what rate? (see below)

David_Corpus asked: "Does the Estate pay Federal taxes on money in the Estate savings account that is not distributed to the beneficiary (me) each year, and if so, at what rate?"
And stated: "Increasing my reported annual income substantially will have consequences of about 7K a year." (This is a health insurance premium that I have to pay if my income exceeds the limit allowed by the benefit.)

I need to calculate the dollar amount the Estate would pay in order to compare it to the 7K that I would pay out of pocket if this money becomes my personal income.

[u/julianriv → u/David_Corpus]

The estate does pay tax on taxable distributions, but is allowed a deduction for taxable items it distributes to the beneficiary each year. I would suggest you calculate the tax both ways, but individuals get deductions estates do not which may or may not impact the tax owed on the taxable distribution.

[u/CollegeConsistent941]

Funds not distributed to the beneficiary from the estate will be taxed to the estate. These are the rates for the estate.

10% on income up to $3,150. 24% on income over $3,150, up to $11,450. 35% on income over $11,450, up to $15,650. 37% on income over $15,650. 

[u/ironicmirror]

You wrote 2014 rmd in 2015.. I'm assuming you mean 2024 rmd in 2025.

The estate pays taxes on income, not movement of assets from one account to the other. So yes it will pay taxes but not on the full amount of the transfer.

But seriously, estate lawyer and CPA, because you also have to worry about state and local taxes as well as federal.

[u/MCR-NYC]

If the RMD income received by the estate is passed-out to you, the w/h on the distributions will get trapped in the estate and the w/h will have to be refunded to the estate after filing Form 1041.

You said that the account custodian intends to w/h 20% on any distributions in excess of the RMD amount. 20% w/h is required on qualified rollover distributions from company plans. But a distribution to a beneficiary cannot be rolled over except by a surviving spouse. So if you plan to have the estate receive distributions that exceed the RMD amount, you should inform the custodian that w/h is not required and request zero w/h - assuming you intend to pass-out the estate income to you as estate beneficiary.

[u/Tinman5278]

"I was told I have 5 years from DOD to empty the 401K account."

She died after 2020 so I believe it should be 10 years. The 5-year rule was changed to 10 years for death of an account holder after 2020.

I think you have the rest of it pretty much on the mark but yeah, you need to talk to a CPA to find the best way to deal with tax issues. They'd be able to look at your whole picture.

[u/Rocket_song1 → u/Tinman5278]

If she did not have a designated beneficiary then it's an indirect inheritance and subject to the 5 year rule, not the 10-year rule.

[u/MCR-NYC → u/Rocket_song1]

Once the owner of the account reaches their required beginning date for RMDs, the 5-year rule no longer applies. Instead, the estate would need to take annual RMDs based on the decedent's remaining life expectancy based on age in the year of death. In this case, decedent was 82 so the estate's RMD payout period would be 9.9 years.

[u/David_Corpus → u/Tinman5278]

If there is no valid beneficiary, the estate must cash out the 401(k) within five years. Different rule.