401k plan

Submitted by Eric Gilbert on Mon, 2015-08-17 18:22

Hi, need some help. My brother passed away in Texas where I live as well (he had only an ex-wife, had not made a Will and had no children). Via the letters of testamentary, my sister (also in TX) and I can act independently and, as such, I have had the qualified plan distributed to his Estate account. Vanguard took only 10% for federal (no state tax in TX). The remainder of his account is now with Chase bank as an Estate account. Do I simply distribute the entire thing to me and my two siblings now (two of us are in TX while one of us is in Indiana) and let them know to prepare for their pending 2015 income tax burden? Or, is this something we can do over time to lessen that burden? If so, what’s the ramifications of having an open Estate account? I’m just not sure how to proceed from a tax perspective and feel I may be overlooking something. FYI, my Mom wants us to divide her share among the three of us.

Thanks for any guidance you can offer.



Submitted by Alan - IRA critic on Mon, 2015-08-17 19:12

  • When an estate is the beneficiary of a 401k, in most cases the plan will only offer the lump sum distribution that you took. The distribution is taxable to the estate on Form 1041, but the estate tax rates are much higher than most individual rates. Therefore, the estate should pass through each beneficiary’s share  to the beneficiary and Form K 1 will be produced showing the taxable income to be reported on the beneficiary’s own return. You should warn the beneficiaries to increase their withholding or pay quarterly estimates starting in Sept to avoid any underwithholding penalties. When the estate files the 1041, there will be a refund to you as administrator that you can distribute to the beneficiaries. There is no effective way to reduce the tax burden of a lump sum distribution other than passing it through to beneficiaries to avoid the higher tax rates that apply to estates.
  • If your Mom is also a beneficiary of the estate, she would need to complete a qualified disclaimer or partial disclaimer so that her share would go to the other beneficiaries in proportion.

Submitted by Eric Gilbert on Mon, 2015-08-17 19:26

Ok, thanks so much for your help.  Just so I’m following…the plan of action I should take immediately is to distribute all assets to my siblings and close the Estate account.  This will avoid estate tax rates and pass the tax burden onto each beneficiary and thier 2015 taxable income.  A K1 will be sent to each bene from Vanguard for tax preparation at the appropriate time.  The 1041 filing is seamless to us correct?  If you would like to comment on how to pay quarterly estimates or increase withholding…that would be great.  If not, I’ll research further.  As for our Mom, I’ll make sure she completes a disclaimer.  Thanks again!  Eric

Submitted by Alan - IRA critic on Mon, 2015-08-17 23:10

  • VG does not issue the K1, the K 1 is produced by the tax software used to file the 1041, which is the income tax return for the estate. You will need a Tax ID# from the IRS to file the estate return. You should probably have the 1041 done by a tax professional because these are tricky if you have never done one. Since the result affects all the other beneficiaries as well, an error creates more problems than one on your own personal return. An estate can tax year can end on 12/31 or have a different fiscal year, so termination is more efficient if done before another year begins.
  • Quarterly estimates are due on 9/15 and 1/15/2016, so if each beneficiary can estimate what  additional taxes will be produced by the K 1 income, they can download the forms and make the payments. Or if they have a source to withhold from (job or pension), they can increase the withholding instead.

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