401K rollover to Estate Account | Ed Slott and Company, LLC

401K rollover to Estate Account

Hi, I am hoping someone can help clarify regarding 401k options where the owner is deceased and no beneficiary designated. A relative is executor of an estate where the unmarried deceased party held a 401k account totaling close to 1 million dollars. There were no designated beneficiaries on the account and the plan documents state the funds must be rolled over within 90 (now 30) days or the funds will be disbursed in a lump-sum. Further, the plan documents indicate the estate is the payable entity when there is no spouse or designated beneficiary.

To further complicate matters, the probate attorney has suddenly passed away and had no partners, which has caused great distress and difficulties in obtaining advice and original documents. The trust has 7 beneficiaries (one of which is charity).

From conducting research it appears this question has come up more than once in the past. Other posts have stated that an estate is not and cannot be a designated beneficiary and, therefore, is not eligible to receive a rollover from a 401k. The other postings point to 26 U.S.C. 402(c)(11) as the legal cite that prohibits a rollover from a 401k. Looking at the citation I do not see where it specifically disallows a rollover from a 401k, but through research I currently have the following interpretation:

Prior to 2007 rollovers from all types qualified plans (including 401k plans) to undesignated non-spouse beneficiaries were not permitted. Beginning in 2007 402(c)(11) permitted rollovers in limited circumstances from qualified trusts (specifically 401a plans) to non-spouse beneficiaries. This does not include 401k plans. Therefore, 402(c)(11) does not specifically disallow rollovers from 401k plans, but there is currently no area of law that would permit a rollover from a 401k to a non-spouse (undesignated) beneficiary.

Is the above interpretation correct? Or, is there a possibly better citation out there? Other family members have contacted multiple large brokerage firms and inquired if the funds may be rolled over. The brokerage firms have advised that a rollover to an estate account is possible and allowed. I have listened in to more than one call and the situation presented was accurate. I think the individuals who answer inquiries at these firms are thinking a rollover from one qualified plan to another should be ok, but lack technical knowledge in this specific area. Additionally, we have inquired with more than one CPA and have not been able to obtain clear answer.

Having heard a rollover should be ok from more than once source, the family members have a hard time accepting my interpretation that facilitating a rollover is not permissible. With time running short until the lump-sum is paid and considering the tax implications, tensions are running a bit high and I want to be able to provide an accurate legal cite and interpretation to the estate beneficiaries to help ensure the process continues on the right path. Any help would be greatly appreciated.

  • When an estate inherits a 401k plan, there is NO rollover to an inherited IRA permitted because an estate is NOT a designated beneficiary. The executor of the estate cannot assign the proceeds to inherited IRAs for the estate beneficiaries as they can for an estate inherited IRA account.  Most plans will not permit periodic distributions to the estate under either a 5 year rule OR the remaining life expectancy of the decedent if the decedent passed after the required beginning date. Rather, the plan will make a lump sum distribution that is taxable in a single year, which spikes the tax rates for estate beneficiaries when such distributions are passed through to those beneficiaries. The same is true for a non qualified trust beneficiary.
  • You mentioned a trust beneficiary. If the trust is qualified for look through treatment (several requirements apply), then the oldest beneficiary of the trust can be treated as a designated beneficiary and a direct rollover to an inherited IRA is permitted. However, the trust must be named as beneficiary on the 401k plan document or referred to if the trust is a testamentary trust created in the will.
  • Therefore, you are basically correct. Sec 402(c)(11) reflects the results in IRS Notice 2007-7 for Sec 829 of the PPA of 2006. 

I have a similar situation and agree with your conclusion but am wondering about avoiding the 20% mandatory withholding from the proceeds going to the estate.  Common sense tells me that since the estate cannot rollover the distribution, it is not an "eligible rollover distribution" for purposes of the mandatory withholding.  Unfortunately, an eligible rollover distribution, as defined in 402(c)(4) does not refer to whether the distribution can, in fact, be rolled over.  I have seen the statement that such a distribution to an estate from a QRP is not an eligible rollover distribution in other forum posts, but can not find a cite for such statement.  Can you help?

Note that the definition of eligible rollover distribution (ERD) in 402(c)(4) indicates that an ERD is "made to an employee". 402(c)(9) further states that if such distribution is made to the employee's surviving spouse after the death of the employee, the ERD provisions apply as if the spouse were the employee. ERDs are therefore limited to these two parties, and any distribution made to a non individual or a non spouse beneficiary cannot therefore be considered an ERD. And mandatory 20% withholding does not apply to distributions that are not ERDs.

Also, section 401(k)(2) establishes that 401(k) plans are indeed retirement plans qualified under section 401(a), so section 402(c)(11) does apply to 401(k) plans.

  • Section 402(c)(11) requires that there be a "designated beneficiary," which means individuals (and trusts for the benefit of individuals).
  • How does a trust come into play here?  You said that the benefits are payable to the estate.
  • Why are you asking legal advice of an accountant?
  • You should yell and scream at whoever planned the estate for not recommending that the decedent designate beneficiaries so as to obtain the stretch.
  • Bruce Steiner
 

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