convoluted inheritance of 401k
My client ( Terri) is the daughter of Joe who passed at 85 last year. he still had a 401k worth 700k. we have no idea how the benes were set but she has two sisters. my client Terri says her sister is the executor and that the 401k is going to a beneficiary trust and then each bene will get their proceeds made payable to a financial institution FBO Terri, etc.
she thinks the 401k was payable to her sister who is the executor and father only had a will. if so, how can the sister create a bene trust and give proceeds to other sisters and tell them if they roll the funds over, they can avoid taxes and it will fall under the 10 year rule?
how would a new financial institution honor this rollover to an inherited IRA? or is she opening a trust account ( if so, there arent any docs that i am aware of) so as her advisor, i have no idea how to help with the proceeds.
I admit, this could all be perfectly legitimate, but i have never seen an inherited 401k to IRA processed like this.
thoughts? TIA
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-18 14:59
There are several possibilities here. The actual beneficiary could be the estate or a testamentary trust, but if it’s a trust created under Joe’s will, the trust will have to be specifically listed on the 401k, eg “trust created under my will dated xx/xx/xxxx”. If not listed then the estate is the beneficiary.
If the estate is the beneficiary, the plan will issue a total distribution to the estate, and there is no possibility of direct rollovers into inherited IRAs. The executor can pass through the distribution to the individual will beneficiaries on a K1, and they will then report the income on their personal returns.
On the other hand, if a trust qualified for look through (including a testamentary trust) is the named 401k beneficiary, then a direct rollover to an inherited IRA in the name of the trust can be completed, and distributions from the inherited IRA to the trust can be done under the 10 year rule with annual RMDs based on the oldest trust beneficiary.
If the trust is not qualified for look through, the annual RMDs to the trust are based on the decedent’s ghost life expectancy.
Therefore, the plan beneficiary wording and the provisions of any trust must be clearly determined before knowing what options are available to these beneficiaries.