401-k death of owner no beneficiary | Ed Slott and Company, LLC

401-k death of owner no beneficiary

Client dies with 401-k balance excess 300K. no spouse. no beneficiary named in 401-k document. 2 daughters named as beneficiaries in will. what options allowed?

  • 401(k) plan provisions almost always state that, if no beneficiary has been designated by the employee, the beneficiary will be the spouse of the employee.  If no surviving spouse exists the usual alternative is the estate of the employee.  You can probably find this in the Summary Plan Description, or just ask the plan administrator or recordkeeper.  
  • It would be desirable to establish beneficiary IRA accounts for the daughters to give them the ability to stretch the distributions, but this can be a complex matter when the estate is the beneficiary.  Other postings on this site have covered the topic in detail.  The goal should be to avoid making a single lump sum distribution to the daughters.  This would cause them an immediate surge in income, would probably place them into a high tax bracket for the year of distribution for all of their income, and would deny them the benefits of the stretch distribution.  
  • Another goal is to avoid having the distribution taxed to the estate, which would be at high fiducuary tax rates.  If a lump sum distribution from the 401(k) plan canot be avoided, the tax imposed on the daughters can be somewhat mitigated by having the estate make two distributions to each of the daughters, with the first in 2016 and the second in 2017, but all within the first fiscal tax year of the estate.  This will spread the distribution to the daughters over two calendar tax years, and may help to prevent their tax rate from going to a higher bracket.  But the distribution will be fully made within the first fiscal tax year of the estate, which will reduce or eliminate paying tax at the high fiduciary tax rates.

In addition to Benn's comments, the following is copied from a Natalie Choate article addressing the restrictions that apply to an estate beneficiary of a 401k plan vs. an estate beneficiary of an IRA:

the plan is not obligated to allow any payout option not provided for in the plan document. If the plan calls for a lump sum distribution of death benefits (as most do), the plan will not and cannot allow exceptions to this rule. The plan must be administered in accordance with the plan documents.Second, qualified plan benefits generally cannot be "rolled over" or transferred from the qualified plan to an inherited IRA. There is an exception to this rule for designated beneficiaries--a designated beneficiary can instruct the plan to transfer his or her benefits directly from the plan into an inherited IRA, thus allowing the beneficiary to obtain a life expectancy payout from the "inherited" IRA even though the qualified plan the money came out of didn't offer this option.However, in John Doe's case, the estate is the beneficiary of the plan. An estate cannot be a "designated beneficiary," therefore the estate does NOT have any right or ability to transfer the inherited 401(k) benefits into an inherited IRA. With a 401(k) plan the estate is truly stuck with whatever payout options the plan allows.

I have a new client who just found out he is the beneficiary on 2 IRA's and 2 Roth IRA's from an ex girlfriend. She passed away in 2013. He was just notified this year that he is the bene. on these accounts. What options should he consider taking regarding the missed distributions since no distributions, as far as he knows, have been taken for 2013(year of death), 2014 and 2015. Additonal facts she was under 701/2 he will be 71 in July.

He needs to determine the year end amounts for 2013, 2014 and 2015 in order to know the RMDs for each year. There is no year of death RMD for 2013 since she passed prior to her RBD. He then needs to make up the late RMDs and file Form 5329 for 2014 and 2015 and indicate the reason for the late RMDs. To determine the late RMDs he needs to confirm that he was the sole beneficiary on each account and was named on the accounts rather than inheriting through her estate, The Roth RMDs are almost surely tax free, and the TIRA RMDs are probably 100% taxable unless he can determine that he inherited basis from her final 8606.

  • Benn's suggestion about splitting distributions to beneficiaries over two calendar years, but within one fiscal year, seems to run afoul of IRS rules.  IRS publication 559, under "Distributions to Beneficiaries", has a paragraph entitled "Different tax years", as follows:
  • Different tax years. Each beneficiary must include his or her share of the estate income in his or her return for the tax year in which the last day of the estate's tax year falls. If the tax year of the estate is a fiscal year ending on June 30, 2016, and the beneficiary's tax year is the calendar year, the beneficiary will include in gross income for the tax year ending December 31, 2016, his or her share of the estate's distributable net income distributed or required to be distributed during the fiscal year ending the previous June 30.
  • This would suggest that all distributions during a single fiscal year of an estate need to be reported within a single beneficiary calendar year.  Are there any ways around this?

 

Yes, this was also clarified in a different thread.  But another approach can often be taken for distributions from an inherited 401(k) that does not offer a stretch to a non-spouse beneficiary.  Many 401(k) plans have a plan provision that requires the account to be completely distributed within five years of the date of death, rather than requiring a single lump sum distribution.  If the plan also allows multiple distributions during the five year period, the beneficiary would at least be able to obtain a five year stretch.  This would prevent a large surge of income to the beneficiary by spreading it over five years.  If the beneficiary is an estate, it would need to be kept open during this period.

 

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