Forgotten Retirement Account

Submitted by Ed Farmer on Mon, 2017-11-13 14:24

Facts:
– Account owner forgot about a company retirement account
– Account Owner died in 2011 at age 83, never had taken any distributions. The estate was not probated
– Spouse died in 2012. They never assumed the account.
– Children discovered account in 2017.
– Small Balance ($30,000). Claimed Account via a Small Estate Affidavit
– Company issued a check to the decedents estate after withholding 20% (net check issued is $24,000)
– Company alerted family they may have to the 50% Excise Tax since no distributions were ever taken.

Their CPA believes if they can deposit the check into an Estate held IRA account they can reclaim the 20% withheld and deposit as well. In the mean-time the family can file to have the 50% Excise Tax waived. After all of this settles they can distribute the funds to each of the 3 heirs into Inherited IRA accounts.

Does all of this sound reasonable and should be able to be accomplished? Are we missing anything? How fatal is the 20% Withholding to still characterizing the dollars as retirement account dollars? Someone I spoke to has said they believe since the 20% has been withheld it cannot be considered retirement funds any longer (income tax paid) thus cannot be rolled-over/ deposited into an Estate held IRA Account.

I will appreciate your input and guidance. Thank you, Ed



Submitted by Alan - IRA critic on Tue, 2017-11-14 02:42

  • Unfortunately, a rollover is not possible. A rollover is only possible from a qualified plan to a designated beneficiary, but the spouse’s death in 2012 eliminated that option. 
  • Check should have been issued to the surviving spouse’s estate. And there should have been NO withholding since the 20% withholding only applies to eligible rollover distributions, and this is not eligible for rollover. Surviving spouse’s estate may have to be re opened and a 1041 filed to get the withholding refunded to the estate. The tax bill for the distribution will probably be passed through to the estate beneficiaries, as well as the net amount distributed.
  • The 50% excise tax will likely be waived, but technically there should be a 5329 filed for 2012 and each year since by the estate. This is a hassle because the year end balance for each year is required to determine what the RMD would have been each year.

Submitted by Ed Farmer on Tue, 2017-11-14 14:00

 Alan- This distribution is from a Defined Benefit Plan.  It sounds like even if we use the same dollar amount for year-end balance there should be a different calculated amount each year based upon life expectancy. We are thinking it is best to hold the funds until the family receives the IRS Waiver Letter(s) just in case they do not waive the excise tax. Is there any benefit to using the 5 Year Rule in this situation?  One 5329 for the final year of distribution—2017? Since the 20% Withholding was incorrectly withheld the family could reclaim it, but you believe only if they run the claim back through the Surviving Spouses Estate?  So, filing it through the decedent’s estate will not work? If the family just simply distributes the funds “as is” they will be running afoul of IRS Regs and will one day receive a letter from the IRS demanding funds—taxes, interest, penalties.  At that point it would be difficult to get out the tight spot I suspect? This is not a pleasant situation for them to fix. I appreciate your help. -Ed 

Submitted by Alan - IRA critic on Tue, 2017-11-14 16:01

  • The 5 year rule only applies for deaths prior to the required beginning date. Strange that the DB plan was not being paid out to the participant, or was he not retired at 83?  Would surviving spouse only have been eligible for a % of what participant could have collected?  In any event if the proper beneficiary distribution for each year cannot be determined with any accuracy, they might just use the amount distributed for the year end balance for each year. The IRS has not been levying the penalty on estates as far as I know, and they have a reasonable cause to state with the 5329 forms. 
  • Surviving spouse inherited this plan as the beneficiary so that estate (EIN acquired for it?) should have received the lump sum distribution and would have to report it on a 1041. As always, if there was any special plan provisions they would override any of these assumptions. I think the CPA probably was thinking about an inherited IRA being assigned to estate beneficiaries, but that is different because the funds started in an IRA. With a qualified plan payable to an estate because either the decedent or designated beneficiary has passed there is no possible direct rollover or 60 day rollover as the payee is a non spouse, and also a non individual in this case (estate).
  • The 5329 forms should be filed by surviving spouse’s estate? Wasn’t the check paid to that estate, and if not what was the reason?  What firm is administering this plan? Sounds like it may have been in violation of the RMD Regs itself before any of these deaths unless participant was still working at 83. Again, there is little chance the IRS will levy an excess accumulation penalty in this situation, particularly if a 5329 is properly filed, and that  can be done now that a full distribution has been paid. The larger problem is if the 1099R is issued to the wrong entity?  DId surviving spouse have a will?

Submitted by Ed Farmer on Tue, 2017-11-14 17:11

 Additional facts to answer questions: – Decedent had not worked for this large U.S. Based international company since early/ mid 1990’s and had not been actively working for many years.  They had forgotten about this retirement benefit account. – Family received an escheat notice from the company.  The daughter lives in parent’s former home & received the letter. – The company had no record of a beneficiary other than the Estate of the Deceased Former Employee. – The company did not complain or inquire when they filed the claim under the Deceased Employees Estate (Small Estate Affidavit) and EIN. – The 20% was withheld and sent to IRS under the Deceased Employees Estate EIN–not the Spouses Estate. – We do not know any of the Plan’s provisions. – The check was made payable to the Deceased Employees Estate—not the Spouses Estate. After reviewing this information with the CPA he is thinking (since this appears to be turning into a convoluted mess) he will have the Estates Representative give him authorization to talk with the IRS on their behalf to see what can be worked out rather than returning funds, re-opening another estate, attempting to claim the 20% attributed to another estate, then filing multiple 5329’s.  Surely, at this point there must be a cut to the chase solution. I appreciate your input.  This is one reason we impress upon our clients to name beneficiaries on ALL accounts where needed and keep track of all acounts.  Thank you, Ed 

Submitted by Alan - IRA critic on Tue, 2017-11-14 18:43

Yes, so convoluted by a series of foul ups that the usual solutions will not fly. Under ERISA, if client was married at the time of his death and spouse did not sign a waiver, the surviving spouse would be the automatic beneficiary of this plan, not his estate. Then surviving spouse took no action so surviving spouse’s estate would inherit the plan.It is surprising that a large company with professional account administrators would blow this in multiple areas. As is obvious, just one of these errors is enough to send the account entirely off the road into a bad chain of events. At this time some improvised and compromised solution is required. If the beneficiaries of each will or intestate provisions will be the same either way, there should not be any beneficiaries contesting these actions. And other than being named a direct beneficiaries, there was not much of a stretch left that was lost based on the ages of the decedents. The CPA would know better what risks would arise from just reporting the distribution to the decedent’s estate per the anticipated 1099R. Hopefully, some internal audit of the plan would not identify ERISA and RMD errors that would cause the plan to reform what they have already done. Meanwhile, the 50% penalty is probably the least of the potential problems because the IRS apparently does not levy this on estates. The IRS would likely approve the 5329 forms without concern of the respective amounts for each year as long as the explanation shows that the entire balance was distributed. 1099R should also indicate a total distribution.  I assume the re opened decedent’s estate would then pass through the distribution on a K 1 to each beneficiary, and it would be taxable in 2017. 

Add new comment

Log in or register to post comments