Is an Estate account mandatory?

Submitted by Bradley Westpfahl on Fri, 2022-11-18 17:42

My brother in law died suddenly five days after finalizing a divorce. He had not removed his now ex-wife as beneficiary from four different retirement accounts. They are a 401(a), 457(b), Traditional IRA and a 403(b). Her beneficiary status was voided by Probate Court based on Florida law leaving no designated beneficiary. I was named Administrator.

At least one of the institutions (it rhymes with Ranguard) moved his personal 401(a) account into an Estate 401(a). The Probate Court has now declared five heirs with specific shares of the Estate. They issued an order to each of the institutions to rollover funds in specified shares to the heirs.

IRS pub 590-b appears to consider these heirs as non-designated beneficiaries subject to the five year rule. Interpretations of IRS 2007-7 indicate that assets moved to an Estate account cannot be subsequently rolled over.

Is there a way to distribute funds from an individual account to non-designated beneficiaries under court order in this situation without an intermediary Estate account? If so, should I ask for any estate accounts to be restored to individual accounts to accomplish the more favorable tax treatment that would come with each heir realizing income at their own tax rate over the five years?



Submitted by Alan - IRA critic on Sat, 2022-11-19 22:01

  • Generally, a court order does not override the federal tax consequences of that order. Therefore, as you indicated, the 3 non IRA plans were ordered to the decedent’s estate, clearly a non designated beneficiary of these plans. Further if the plan is then ordered to execute a direct rollover to an inherited IRA, clearly disallowed by the tax code, this would create a taxable distribution for the estate and an excess contribution to the inherited IRA which must be removed. This all adds up to a lump sum distribution, which is likely to have been required by these plans if these balances were left in a beneficiary estate account within those plans. Few plans would hold these estate accounts and distribute them under the 5 year rule (if participant passed prior to RBD or under participant’s LE if participant passed post RBD). 
  • The inherited IRA should be salvageable, since the balance is already in an IRA. An estate beneficiary of an IRA would fall under your authority to assign the balance (if IRA custodian cooperates) out of the estate to separate inherited IRAs accounts for each beneficiary under the will. This is done by a non reportable transfer. While that would provide some tax deferral to the beneficiaries, their separate inherited IRA accounts would still be subject to the RMD rules of the estate, either the 5 year rule or remaining LE of the IRA owner.
  • Is this standard procedure for FL probate courts. While FL statutes likely nullify a spousal beneficiary upon divorce, with no contingent beneficiary named and no current spouse, the estate will become the beneficiary and eliminate any chance of these balances being directly rolled into inherited IRAs.

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