Defined contribution plan with no beneficiary
A client of mine unfortunately lost her son recently. He was in a union and had a defined contribution pension through them with no beneficiary. Her son had no wife or kids, and at first the pension plan told her that she could roll his money into an inherited IRA.
They have since come back and said that the funds cannot be paid to an inherited IRA, but must instead be paid to an estate bank account. It is my understanding if the funds are payable to an estate, distributions are subject to the 5-year rule.
Is this correct?
If the 5-year rule is used, how does that work in practice? Does the estate have to remain open while distributions are being made?
Is the defined contribution plan left open in the original owner’s name while distributions are made?
Permalink Submitted by Alan - IRA critic on Fri, 2021-06-25 23:00
Yes, it is correct and even worse than the 5 year rule. The payment to the estate would be a lump sum distribution and would be entirely taxable in 2021. The only way to split this up would be if the DC plan set up a beneficiary account and paid it out over 5 or 6 calendar years. But almost no such plans provide for this, they mostly all require a lump sum check to be issued to the estate. There is no way for these funds to be moved into an inherited IRA because this is only allowed for a designated beneficiary or qualified trust beneficiary. Therefore, there is no benefit for the estate to remain open since the estate is going to receive the entire taxable benefit up front, can pass it through to the will (or intestate beneficiary) and then close the estate.