I have an unusual situation from a client:
My sister had a fiance that committed suicide in March of 2014. He had a will and left everything to my sister. His assets were comprised of a small amount of cash, a home and a 401k account. Here is where it gets weird. My sister's fiance was previously married and as part of the marriage dissolution received received one-half of the ex-wife's 401k account in the settlement. The 401k was never actually received by the fiance and was actually not even found until recently (approximately 300K). My sister then committed suicide in October of 2014. She had three kids and she did not have a will.
I know the 401k account must be taxed and that there was not a beneficiary since the account was never transferred to the fiance prior to his death.
How is the 401k taxed in this situation? Is it taxed on the fiance's estate income tax return and then, the remaining distributed to my sister's estate.