default 5 year method RMD

Submitted by Michael Seese on Tue, 2017-12-05 18:32

1.Husband and wife pass away in terrible accident
2. Both under 70 1/2
3. Husband has 600k in 401k
4. 2 bene in late teens
5. Money stays in 401k and split into one account for each bene.
6. No RMDs taken out during last 5 years.
7. Children receive just received letter saying 100% of money has to be paid out by 12/31/2017.
8 Children approach me to see if they have options.
9 Each account now has 600k in it
10 Children say they were never made aware that they had to take money out and they also ignored account because of tragic loss of parents.

My question is there anyway to change back to stretch IRA and make up RMDs?
Is there a way to get an exception from IRS?

What if any options do they have and what steps need to be taken ASAP?

Thanks



Submitted by Alan - IRA critic on Tue, 2017-12-05 19:25

  • The plan provisions must be examined to determine whether the 5 year rule or LE is the default method, as some employer plans were not changed as were IRA contracts. The plan could provide for an election by the end of the year following the year of participant’s death, or the plan might have special provisions for simultaneous deaths. The Simultaneous death Act could also influence this. Reconstructing the chain of events in terms of the plan provisions is necessary to determine the applicable distribution period. 
  • Under the circumstances, plan notification is another area that should be investigated in terms of what was required and what was done by the plan and by the custodian of the minors. While it is inconceivable that such custodian would ignore close to 1,000,000 in death benefits for the minors, anything is possible.
  • All the above needs to be considered and the results possible considered by a tax attorney with respect to the benefits of pursuing a PLR or if there is any legal liability on the part of the plan administrator. 
  • Finally, how and when was this death benefit awarded to the minors? Were they named as secondary beneficiaries, was there a post death disclaimer? 

Submitted by Michael Seese on Tue, 2017-12-05 20:28

Lets say the administrator did everything correct. Beneficiaries just dropped the ball and did not take RMDs. What options do the beneficiaries have as far as exceptions?

Submitted by Alan - IRA critic on Tue, 2017-12-05 22:25

  • If the administrator made NO errors whatsoever, meaning errors that were entirely their errors, then expect no help at all from the plan, and there certainly would be no recourse against the plan even given that minor status of the beneficiaries. Beneficiaries will likely receive lump sum checks any day now that will trigger a huge 2017 tax bill. However, there will be no RMD related penalty because the distribution will not be late.
  • Perhaps not worth the cost of a 15-20k PLR request, they might check with a tax attorney who files PLR requests to get an opinion on whether the IRS would consider allowing a rollover of the amount received in excess of the LE RMDs up through 2017. That would knock down the 2017 tax bill considerably due to their young age and preserve a stretch for the majority of the account. This would have been the case had they requested direct rollovers to inherited IRAs by 12/31/2013.

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