estate as benefciary of 401k
My client’s father had a 401k plan in which he named only his wife as beneificiary. Default is estate. The wife passed away last year and the father passed away shortly afterwards. The father was in RBD age 82. She is being told by the custodian that her and the other survior has one option and that is a total lump sum payout. The 401k is over 600k. My understanding is that if the plan allows she could take life expectancy payouts based on her deceased fathers life.
Permalink Submitted by Alan Spross on Tue, 2008-02-12 23:56
You are correct. This applies even when the estate is the default beneficiary. Following copied from IRS Regs, which the plan administrator needs to review:
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(3) No designated beneficiary. If the
employee does not have a designated
beneficiary, the applicable distribution
period measured by the employee’s
remaining life expectancy is the life
expectancy of the employee using the
age of the employee as of the employee’s
birthday in the calendar year of the
employee’s death. In subsequent
calendar years the applicable
distribution period is reduced by one for
each calendar year that has elapsed after
the calendar year of the employee’s
death.
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Permalink Submitted by Jon Heller on Wed, 2008-02-13 15:32
Thanks for the update, further clarification need; The 401k is being paid to the estate with the option of 9yr (fathers life exp) or lump sum. Then will be paid out to the listed beneficiarys of the trust. This will mean tax to the estate and then tax to the beneficiarys, is there not an option to be paid directly to the beneficiarys?
On a different question if a beneficiary is receiving payments based on life expectancy and is under the age of 59 1/2 is there a 10% penalty if they distrupt the payout with a larger lump sum?
Permalink Submitted by Alan Spross on Wed, 2008-02-13 19:45
No, there is never a penalty when payment is made to a beneficiary, regardless of the payment structure. Box 7 of the 1099R will be coded with #4 to show the distribution as a death benefit.
I think you meant “estate” where you showed “trust”. The estate 1041 would report the IRA income, but that would be offset by the distribution deduction. Therefore, the taxes would be paid by the beneficiaries at their own rates per K1 issued by the estate. Meanwhile, the estate does not need to stay open for years. It can be terminated and the IRA can be assigned to the beneficiaries. Election of a 9 year payout does not mean that the payout cannot be accelerated or cashed out. The IRA custodian would probably be happier if it was cashed out.