401k, Trusts, Probate
Hello all,
A relative passed away a couple months ago and left a trust and a will. He named his workplace 401K as an asset in his trust. However, the asset was never transferred.
Should we try to go ahead and transfer the 401k to the trust? Would it be better to go through probate? I’m not sure what the tax implications are for each route.
Thanks
Permalink Submitted by Alan - IRA critic on Wed, 2024-08-14 17:30
Who was the beneficiary on the 401k plan? If not named and if married the surviving spouse becomes the beneficiary. The plan must be checked to determine if there are any default beneficiaries that apply, but if not married and no default beneficiaries are specified by the plan, then the relative’s estate will be the beneficiary and the 401k assets will be subject to probate. And in such a case, the will would determine who inherits, and if no will either, then the intestate provisions of the state.
If the estate is the beneficiary, the plan will typically require a lump sum distribution to be made to the estate. The estate can use that money to pay the expenses of the estate (eg final medical, credit card bills, taxes, etc), and pass what is left to the estate beneficiaries on Form K1. The amounts passed to beneficiaries will be taxed at their individual rates.
Perhaps he had a pour over will that transfers the plan balance to the trust, but if the trust is not listed on the plan it will not be qualified for look through. In that situation, the 5 year rule would apply if relative passed prior to RBD, and relative’s remaining life expectancy if they passed post RBD.
Permalink Submitted by Davey on Wed, 2024-08-14 17:38
There was no beneficiary on the 401k and no spouse. When you say “if the estate is the beneficiary”, do you mean the “trust”? The assets have not been transferred to the trust, but there are documents signaling his intent/desire to do so (also a pour over will).
Unfortunately, the deceased was only 33 years old. He did have a pour over will. Is it better if the assets go first through the trust, or directly to any beneficiaries via probate?
What are the taxable events for both situations?
Not sure if i’m asking the right questions here.
Permalink Submitted by Alan - IRA critic on Wed, 2024-08-14 18:51
Most likely, with no spouse, the estate will be the beneficiary and the 5 year rule will apply. That’s bad enough but when the estate is the beneficiary, plans will usually distribute a lump sum to the estate with no alternatives. The pour over will transfers the distribution into the trust, but the tax bomb will have hit.
Conversely, if the relative had just named beneficiaries directly on the 401k, if they were 23 years of age or older, they could do direct rollovers to inherited IRAs and stretch the RMDs over their lifetime. If the beneficiaries were minor children, they could receive inherited IRAs with very low annual RMDs until they were 21, then the 10 year rule would kick in.
And if he named the trust directly as beneficiary (without going through a pour over), the trust would probably be qualified for look through, and RMDs would be based on the oldest trust beneficiary. Also, the balance could have been directly rolled over to an inherited IRA for the trust. If no trust beneficiary were more than 10 years younger, it might also have been possible to avoid the 10 year rule (not sure).
The plan will make the distribution per the beneficiary designation on the plan, and if it turns out to be the estate as expected, probate will be required even if the balance is poured into the trust. And the infamous lump sum distribution is the worst part.
This appears to be a disastrous estate plan. The trust attorney should have made it clear that the trust was to named as the beneficiary of the plan, if not the individuals outright.
Permalink Submitted by Davey on Wed, 2024-08-14 20:00
Can I perhaps call you? I’d be willing to pay for some advice.
Thank you, this is very complicated.
Permalink Submitted by Alan - IRA critic on Wed, 2024-08-14 20:14
Sorry, but I don’t offer services beyond this forum. You should probably contact a local trust and estates attorney after determining if you feel that the attorney who drafted the current trust/will is acceptable. I would expect that this attorney would likely state that the relative should have named the trust as beneficiary directly on the plan document. That attorney should also be able to explain the purpose for the trust.