Status of Surviving Spouse’s Estate

Submitted by Michael Williams on Thu, 2017-09-07 09:04

Mom died in the spring of 2016, dad that summer. Mom would have turned 64, dad 73. They were each the other’s sole spousal beneficiary without contingents. Dad did nothing after mom passed. So all plans as they were during life go to estate of dad. As executor for both I hope to move qualified assets intact to testamentary beneficiaries. Doing so before September 30, 2017 won’t change the ADP (per Choate). Ideal results are limited to IRAs inherited as successor beneficiaries of dad’s estate. The slowest schedule available will be dad’s single life expectancy. Everything owned by mom gets the 5-year policy (I think). The process of getting there has wrinkles that remain ambiguous to me.
Mom’s 401k resists transformation. Direct rollover to an IRA FBO estate of dad seems blocked. It is unclear to me if the custodian and/or plan administrator simply do not want to do this or cannot do this according to law. Dad was the designated beneficiary. I view his estate as the representation of his interest able to receive his benefit. That notion harmonizes with the preservation of designated beneficiary status through September 30 of the following year despite death. How wrong am I? Is the estate of dad a successor beneficiary?
I expect to be boxed in to a lump sum distribution from this 401k. However, the claim form which would be invalid (so they say) for a direct rollover presents only an oddly specified alternative — a check issued to estate of dad, described as an eligible rollover distribution, with a mandatory 20% withholding. Should I not have the option of omitting the withholding?
Mom’s other 401k is similarly confusing. It auto-rolled into an IRA at a directed custodian when the plan terminated. The claim form seems too coarse. Four accounts at big name custodian (mom and dad each had a Roth and TIRA there) were easily retitled. This custodian may limit me to a “manual” trustee-to-trustee transfer by carefully tailoring the payee field. It looks like they would tag the 1099-R with code 4 as a death distribution. Should it not also or only be marked G? Similar discussions on this forum suggest no 1099-R/5498 should be neccessary to title an inherited IRA as such. Perhaps I’ll be able to move it plan-to-plan from mom’s IRA to mom’s IRA fbo estate of dad at cooperative custodian. I’m unsure if a title change is legal to combine with a change of custodian. Would it be legal for this custodian to provide no path that maintains qualification as an IRA?
As a point of curiosity, does the term “deemed owner” refer to the spousal exception in 401(a)(9)(B)(iv)? In some discussions it seems to indicate the surviving spouse accquired the rollover privilege by default. The term would seem to apply here too, except that it would mean mom’s lifespan is in effect extended to dad’s.



Submitted by David Mertz on Fri, 2017-09-08 00:31

  • It appears that the administrator of Mom’s 401(k) is correct that the 401(k) is not permitted to be rolled over to an inherited IRA.  Because Dad did nothing to move Mom’s 401(k) to an IRA after Mom’s death, and because Dad died before reaching the date distributions to him were required to begin, upon his death § 401(a)(9)(B) causes him to be treated as the owner of the 401(k).  A 401(k) can only be rolled over to an inherited IRA FBO a designated beneficiary.  Only an individual can be a designated beneficiary.  Because the estate (which is not an individual and, therefore, is not a designated beneficiary) is the beneficiary in this case by default, no rollover to an IRA is permitted.  The only course of action permitted by the law under these circumstances distribution of the 401(k) to the estate.  Regarding withholding, 20% mandatory withholding only applies to distributions that are eligible for rollover, and this distribution is not eligible for rollover.  Instead 10% must be withheld for taxes by default unless you specify that nothing be withheld or that more than 10% be withheld.  With the estate being the beneficiary, having taxes withheld would complicate things since the withholding cannot be passed through to the estate beneficiaries on Schedules K-1.
  • As for the other account, it’s not clear what you meant when you said that the 401(k) auto-rolled to an IRA when the plan terminated.  If, as seems to be the case, you meant that the 401(k) was rolled over to a traditional IRA prior to Mom’s death, the fact that the funds had previously been in a 401(k) is irrelevant; it was a traditional IRA at the time of your Mom’s death.  The same § 401(a)(9)(B) as applies to the 401(k) discussed in the first bullet results in the IRA being treated as if Dad was the owner. However, unlike the case with the 401(k), an IRA *is* permitted to be transferred to an inherited IRA FBO Dad’s estate.  It can only be moved by non-reportable trustee-to-trustee transfer.  It cannot be moved by distribution and rollover.  Custodians don’t have to offer trustee-to-trustee transfers, but if they don’t, that would likely have to be stated in the IRA agreement.  However, it seems that the custodian in this case is instead being limited their own inadequate procedures rather than not permitting the transfer.  If the money from this IRA is paid from the original IRA directly to the inherited IRA FBO to the estate, it constitutes a trustee-to-trustee transfer and must not be reported on a Form 1099-R as a distribution and must not be reported on a Form 5498 as a rollover contribution.  It should be handled no differently than the IRAs at the other custodian.  Reporting it implies that there was a distribution to the estate and the estate is not permitted to roll over a distribution.
  • Code G on Form 1099-R only applies to rollovers to or from a qualified retirement plan like a 401(k).  It is not to be used for the movement of funds from one IRA to another no matter how the funds are moved.

Submitted by Michael Williams on Fri, 2017-09-08 02:19

Thank you for the generous feedback. My post should have been more focused and specific. I will bite the bullet and cash out the 401k, but push to omit the withholding.The auto-rolled 401k->IRA looks like it may still be salvageable, but you raise an issue I hadn’t considered. The direct rollover to an IRA happened after both parents died and before anyone had authority manage their finances. So the custodian might have an excuse or requirement to force cash liquidation. “§ 401(a)(9)(B) causes him to be treated as the owner…”  I may be finally getting “deemed owner” — pretend this was dad’s, and that dad was born when mom was.  

Submitted by David Mertz on Fri, 2017-09-08 07:57

  • You would pretend that dad was born when mom was only in the sense that dad was not required to begin distributions until mom would have reached age 70½.  If dad did reach that age, RMDs would then be calculated using dad’s age, not mom’s age.
  • I don’t see how mom’s second 401(k) could have auto-rolled over to an IRA after the death of dad.  It seems to me that that IRA is invalid and that the second 401(k) should have been subject to the same fate as the first 401(k).

Submitted by David Mertz on Fri, 2017-09-08 12:51

  • I’m interested to know the authority under which the auto-rollover to an IRA occurred; was it a plan provision?  How is the IRA that resulted from the auto-rollover titled?
  • I suppose it’s possible that the 401(k) plan had a provision in its plan agreement that upon the death of the employee with the employee’s surviving spouse as the sole beneficiary, the 401(k) would automatically be rolled to an IRA for the surviving spouse.  However, such a provision would be problematic since the surviving spouse normally has the choice of whether to roll the 401(k) over to the surviving spouse’s own traditional IRA, to an inherited traditional IRA or to a Roth IRA.  I can’t see that such a plan provision could in all cases operate in the best interests of the surviving spouse, so it would be problematic.  In your case, though, it could result in the IRA ending up as an IRA with the estate as beneficiary.

Submitted by Michael Williams on Sat, 2017-09-09 12:51

  • The “auto-rolled” 401k that is now an IRA still belongs to mom. The 401k->IRA transformation happened during the limbo between death and my appointment as executor which took an inordinate amount of time. The custodian(s) didn’t know anyone had passed away until I received court letters.
  • I did some minor research today with your misgivings in mind. This kind of rollover looks related to Department of Labor guidelines concerning plan administrators with missing or non-responsive participants. It’s much better than escheatment. As a 401k it was held at a large reputable house. Now as an IRA it’s held at a company that seems to specialize in gathering stale retirement plans. So far no one has complained that the IRA was “born” after mom died.
  • I originally mentioned this IRA because the custodian is somewhat like a vending machine or tool. Their reps are responsive but I may be stuck in an error prone position. Best to double check their rights and mine.
  • The account is actually still frozen while waiting on beneficiary confirmation from the former employer. That’s really the first hurdle as the plan administrator left the company and the company itself was bought by a larger company. So the custodian has expired contact info and… needs the employer to sign off on something even though this is an IRA. This account is apparently a touch strange.

Submitted by David Mertz on Sat, 2017-09-09 15:07

If we assume that the IRA in mom’s name that resulted from auto-rolling the 401(k) is legitimate even though the rollover occurred after mom’s death, I don’t think that the 401(k)’s beneficiary designation would have been used to establish a designated beneficiary for the IRA.  That means that the default beneficiary of this IRA under the IRA custodial agreement is almost certainly mom’s estate, but that would be something to check.  Assuming that mom’s estate is the beneficiary, since mom passed before RBD and the beneficiary is not an individual, required distributions are determined under the 5-year rule.  This inherited IRA would need to be transferred to an inherited IRA FBO mom’s estate.  I don’t see any way that it would possible to then move this to an IRA in dad’s name since dad is deceased (and, even if it is possible, doing so would likely require a PLR permitting such a move).  Presumably dad is the beneficiary of mom’s estate, so this inherited IRA would then need to be transferred to an inherited IRA FBO dad’s estate.  Finally, this IRA could be divided and distributed to inherited IRAs FBO dad’s estate beneficiaries.  Throughout, required distributions would be subject to the 5-year rule based on mom’s date of death; these inherited IRAs must be completely drained by the end of 2021.

Submitted by Michael Williams on Sat, 2017-09-09 23:55

  • Hmm, right to mom’s estate. That’s a twist I hadn’t considered. After looking at the business to business side of the custodian’s site I figured the employer screwed up a bit by omitting a beneficiary designation when unloading the plan members. After all, being free of administration is the whole point of turing to this custodian. Then again, the custodian, being a streamlined operation, might work by keeping liability “outsourced” to the employer.
  • It’s funny that the 5-year rule applies whether or not dad is a factor. I respect the point of the legal principle, but in this case spousal privilege is a disadvantage.

Submitted by David Mertz on Sun, 2017-09-10 01:36

  • Unless written into the 401(k) plan agreement, I don’t see that the plan administrator has any authority to designate beneficiaries for the IRA created under these circumstances.
  • I’m not sure what you mean by spousal privilege being a disadvantage.  Because the beneficiary is mom’s estate, dad being mom’s spouse doesn’t come into play unless mom’s IRA is permitted to be rolled over to an IRA in dad’s name and RMDs be determined with dad as owner.  I’ve seen PLRs allowing the surviving spouse to roll over to an IRA in the surviving spouse’s own name an IRA that went to the deceased spouse’s estate as long as the surviving spouse was the beneficiary and executor of the deceased spouse’s estate.  However, given that dad is deceased and cannot act as executor of mom’s estate, I don’t see how the IRA could be rolled to an IRA in dad’s name.  Without the IRA being able to be rolled to an IRA in dad’s name, dad is treated as receiving the IRA from mom’s estate, with RMDs being determined in the same manner as if the beneficiary of the estate was a non-spouse.  PLR 200945001 describes a similar situation except the designated beneficiary of the IRA was the IRA owner’s spouse, that the IRA owner died after his RBD, and inherited IRAs were permitted to be established in the name of the owner FBO the owner’s spouse’s beneficiaries under the owner’s spouse’s will, without having to pass through the either the owner’s or the spouses.  PLR 200945001 also ruled that the 5-year rule applied.
  • This is all my personal interpretation from reading the tax code, various IRS publications and PLRs.  If the amount involved is large enough and you think that there is some chance that the 5-year rule might not apply, it might be good to obtain the services of an estate attorney who specializes in such matters.

Submitted by Michael Williams on Mon, 2017-09-11 00:13

Submitted by Michael Williams on Sat, 2017-09-09 07:55

Submitted by David Mertz on Fri, 2017-09-08 18:18

A correction to what I stated earlier:  § 401(a)(9)(B(iv) causes the now-deceased spouse beneficiary to be treated as owner with regard to determining required distributions from the 401(k).  It does not generally result in the spouse beneficiary being treated as owner.  Instead, § 402(c)(9) and (11) determine whether or not a rollover by a beneficiary is permitted.  Still, I see no opportunity to roll the 401(k) over to an inherited IRA.  This is perhaps where the administrator of the second 401(k) and I differ in opinion, with that administrator maybe believing that, because dad was the sole beneficiary of mom’s 401(k), a rollover from mom’s 401(k) to an IRA FBO dad is permitted even after dad’s death.  However, I’m not aware of the IRS permitting any rollover of a distribution that is made after the death of the individual who was entitled to do a rollover.  The only distributions I’m aware of where a rollover was permitted to be completed after death were distributions that occurred prior to the death of the payee and, generally, that distribution was made with the intent of doing a rollover.  Note that CFR 1.402(c)-2 Q&A-12(b) indicates that “a distributee other than the employee or the employee’s surviving spouse (or a spouse or former spouse who is an alternate payee under a qualified domestic relations order) is not permitted to roll over distributions from a qualified plan.”  I don’t see how dad can be a distributee after dad dies.

Submitted by Alan - IRA critic on Mon, 2017-09-11 02:37

I think that 1.401(a)(9)-3 Q/A #5 results in Dad’s estate being eligible for LE using Dad’s age as Dad passed after his RBD and is treated as the employee. That should also apply to the inherited IRA after it is re titled as an inherited IRA with Dad’s estate as beneficiary.

Submitted by David Mertz on Mon, 2017-09-11 12:52

Submitted by Alan - IRA critic on Mon, 2017-09-11 16:25

Submitted by David Mertz on Mon, 2017-09-11 17:59

I don’t think that you have missed anything.  I’m just having trouble with the idea of it being permissible to end up with an IRA for the benefit of Dad’s estate as beneficiary of Dad since both Mom and Dad were apparently deceased at the time of the distribution from the 401(k).  Perhaps I’m I am the one misunderstanding something here.  If so, that seems to invalidate my response regarding the permissibility of a rollover to a similar IRA from the other 401(k) that had Dad as designated beneficiary, meaning that such a rollover would be permissible.

Submitted by David Mertz on Mon, 2017-09-11 20:57

In possible support of my position, I’ve found PLR 200436017, which, as part of the analysis for its ruling #3, states:

In this case, Taxpayer B, Taxpayer A’s surviving spouse, was the sole designated beneficiary of Taxpayer A’s interest in Plan X. Although taxpayer B survived Taxpayer A, Taxpayer B died prior to the point at which distributions to him from Plan X were required to begin. Taxpayer B did not name or designate a beneficiary of his interest in Plan X. Thus, pursuant to the above cited sections of the Code and “Final” Regulations, Taxpayer B’s beneficiary interest in Plan X is subject to the 5-year rule in section 401(a)(9)(B)(ii).

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