NUA -non designated beneficiary
I’ve run into a situation which I am unfamiliar.
A 401(k) participant passed away in 2017 naming the estate as the beneficiary. The account has significantly appreciated company stock – NUA is in play
What are the rules when in thee state inherit a 401(k) and NUA strategy wants to be utilized? Can it be done? Who pays the ordinary income tax on the transfer? Who owns the stock after the transfer to the brokerage account? Is it the underlying beneficiary of the estate?
All help is appreciated
Permalink Submitted by Alan - IRA critic on Wed, 2017-11-15 22:23
In this case, NUA should be viable no matter how high the cost basis is since the estate will have to take a lump sum distribution anyway with participant’s death the triggering event. Unlike the usual choice between NUA and rolling the shares over, the rollover choice is now eliminated. The estate would have to report the 1099R income but could distribute the NUA shares to the will beneficiaries or even intestate beneficiaries. The taxable income would also be passed through on a K1 and the executor can transfer the shares in kind to the beneficiaries. Until the beneficiaries sell shares, there is no tax due on the NUA (and no death step up on the NUA either). But when the beneficiaries choose to sell the shares they will be able to pay the LTCG rate on the NUA per share, and they need not sell the shares at any particular time. Their cost basis for the shares will be the cost basis per share that is taxed at the time of distribution. The executor of this estate will need to get professional advice to avoid making a costly error, and the K1 issued by the 1041 preparer will have to be correct.