403b account with no beneficiary

Submitted by James Argoudelis on Fri, 2017-10-27 17:30

I have a client whose daughter had unexpectedly passed away in June of 2017 and had a large 403b in California with her employer. The daughter had no will or any beneficiary on her accounts. The mother is the sole heir and executor of the estate. I called Fidelity to ask for options on distribution and they originally stated that we could rollover the 403b to an inherited IRA with my company. However after the call was completed, Fidelity called back my client and stated that a rollover is not an option since the proceeds are in the ownership of the estate. I then called back and asked if Fidelity would recognize a “pass-thru” to the sole heir, her mother and they again stated that they could not based on the current ownership of the 403b naming the deceased’s name followed by estate.
Does my client have any favorable options available (private ruling, etc..) that would allow her to roll this asset into an inherited IRA for herself avoiding the unfavorable tax rates for estates?



Submitted by Alan - IRA critic on Fri, 2017-10-27 18:13

Fidelity arrived at the correct answer per Sec 402(c)(11) of the tax code. There is no option for a direct IRA rollover to a non spouse beneficiary when the estate inherits a non IRA plan. Client is not a designated beneficiary as required.  Worse, when the participant passes prior to the RBD the 5 year rule applies, and very few plans will drag out the distributions for 5 or 6 years even if the executor of the estate was willing to keep the estate open. Therefore, this is going to result in a large tax bill for a lump sum distribution to the mother. She might at least try to get the plan to make half the distribution this year and the rest in January as that would spread her taxes over two years, and she could still close the estate within a year of the DOD. The chances of the plan honoring this request are probably slim, but it is worth a try.

Submitted by David Mertz on Fri, 2017-10-27 19:38

  • Even though distributions must be made to the estate, the estate would typically pass the income through to the estate beneficiary for taxation on the estate beneficiary’s tax return rather than subjecting the income to estate tax rates.
  • An estate can use a calendar tax year or a fiscal tax year.  When spreading the tax burden over two years by making two distributions, the distributions must be made in different estate tax years.  January 2018 might or might not be in a different estate tax year if a fiscal tax year is used.

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