401K no beneficiary

Submitted by Greg Gohagen on Tue, 2015-04-07 14:37

Hi,

My father passed away a couple of years ago. He didn’t leave a will and didn’t have any assets, so there was no probate of property done. Last year we found out he had a 401K plan but no beneficiary listed. I setup an estate and had the money distributed there. I then sent payment to myself for reimbursement for funeral expenses paid. My question has to do with taxes and how they should be handled. A few facts, 401K was very small (approx $5K). I chose to have federal taxes withheld for the distribution which I believe was a mistake based on research I’ve done. Does an estate return has to be filed? Do I have to claim the money as income on my tax return even though it was money paid to me as reimbursement of funeral expenses? Thanks



Submitted by Alan - IRA critic on Tue, 2015-04-07 18:00

Yes, the 401k distribution is taxable, but funeral expenses are not deductible. If your combined federal and state tax rate is 25%, you would net 3750 on the 401k distribution after taxes and credit for the withholding which I think you can transfer from the estae to yourself. If the funeral expenses were also 3750 you would come out even. You could charge the estate administrative fees, but those fees would be included in your personal income so when you are the 100% beneficiary there is no benefit in charging a fee.



Submitted by Greg Gohagen on Tue, 2015-04-07 21:03

Thanks Alan for the response. If I’m understanding correctly, it seems the amount paid to me for reimbursement for funeral expenses would be treated as personl income on my return. The amount I would recognize would be approx $4K (5K less the $1K for witholding) and I would pay taxes on that amount. I know you mentioned I might be able to apply a credit for the withholding from the estate towards taxes I owed related to the distribution, but I thought I read that was not possible. I thought the credit could only be applied towards taxes owed by the estate. Do you know where I woud be able to get more info regarding this?As far as the estate tax return, do you know if one would need to be filed? I believe there is a federal exemption of $5M so I didn’t think a return would be required. Just wantetd to confirm due to this being related to a 401K distribution. 



Submitted by Alan - IRA critic on Tue, 2015-04-07 21:56

  • I rechecked and only backup withholding credit can be passed through to beneficiaries. Since the 1000 was not backup withholding, you would have to file the 1041 and receive a refund as the administrator of the estate. But you still get the 1000 refunded. However, the 5k showing on the 1099R will be passed through to you and taxable to you. The funeral expenses are not deductible and just an out of pocket expense. But they are also not income.
  • As for the cash flow – estate would receive the 1000 refund of withholding you report on the 1041 so estate now has 5000 to pass through to you. But you also will have to report the 5000 as taxable income on your own return and that will come out of the 5000. Your rate should be lower than the estate income tax rate, but with only 5k of estate income, there is a chance that your rate in not lower. If the estate income tax rate was less, you could have the estate pay the taxes and pass through to you what is left, but tax free. Maybe you should hire a CPA to do the 1041…
  • No estate tax return required since he had almost no assets.


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