Taxation of 401k. | Ed Slott and Company, LLC

Taxation of 401k.

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.

Very strange, and alot of legal work remains that may take considerable time. There is taxable income until a distribution is taken from the 401k. The 401k would be transferred from fiance's estate to sister's estate and then most likely to her kids under state intestate provisions. The first RMD is due by 12/31/2015 (unless 5 year rule applies) however the IRS will waive any penalty in these circumstances with a 5329 request. RMDs to be based on sister's life expectancy as non spouse beneficiary if he had named her as beneficiary on the 401k plan or if not, then his estate is likely the default beneficiary under the 401k plan provisions and RMDs will be based on the non individual beneficiary rules with RMDs depending on fiance's age at his death. 5 year rule would apply if he died prior to RBD.


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