Non Spouse Inherited Qualified ESOP Check
Facts of the case:
I have 4 non spouse (children) beneficiaries of their now deceased mothers employer ESOP plan. They have each been issued a check addressed to them personally for the proceeds of the plan. The stock is privately owned and was bought back by the company. They beneficiary have been told that they have 60 days to roll that into a qualified account to avoid taxation.They have not done anything with these checks to this point. The amount is approximately $17,000.00 to each beneficiary. This is not an NUA issue.
Have they been advised correctly?
Can the proceeds of these checks be cashed by the individuals then put into an IRA, or a beneficiary IRA?
I have been under the impression to that beneficiary IRAS must be funded by trustee to trustee transfer. Is this not correct?
The company says they have been doing this since the beginning of time, but this does not seem correct to me. Any advice would be greatly appreciated.
Thank you in advance, and I look forward to going to your next event.
Permalink Submitted by Alan - IRA critic on Tue, 2015-06-30 16:27
You are correct, a direct rollover would have been required. Perhaps the plan was thinking of a spousal beneficiary or even LSD checks utilizing NUA. Unless the plan is willing to void the checks and do direct rollovers to inherited TIRA or Roth IRAs, the children are stuck with a taxable distribution. In this situation if they are eligible for NUA and the 1099R will show NUA in Box 6, their tax bill will be less since the NUA portion will be taxed at the LT cap gain rate. Another possibility is that if the plan did not provide the children with their options before the distribution, they have leverage to push for a return of the checks and a direct rollover.
Permalink Submitted by Michael Kanik on Tue, 2015-06-30 16:37
I fear this has been done incorrectly for years. In talking to the management of the company they are bothered by my questioning of the situation. Since NUA is not the issue, the only way I see avoiding paying taxes on the full amount in 2015 is if we establish an inherited IRA with a new custoidain and the employer reissues the checks to the new custodian directly. At that point the benificiaries need to take withdraws over their lifetime or within the 5 year rule. Is there anytihng else I am missing?
Permalink Submitted by Michael Kanik on Tue, 2015-06-30 16:46
LSD checks utalizing NUA?
Permalink Submitted by Alan - IRA critic on Tue, 2015-06-30 16:50
That is the only option as I see it. The checks for the children who do not want a lump sum distribution should be returned and direct rollovers done to inherited IRAs for each. If this is done by 12/31 of the year following the year of death, each child can use their own single life expectancy for RMDs. The 5 year rule would only be an option if owner passed prior to mother’s required beginning date.