401k and No Designated Beneficiaries

Submitted by Bill Anderson on Tue, 2023-07-25 23:57

My Brother passed away suddenly in early February 2022. We found he did not designate any beneficiaries on his company retirement fund, company insurance and lastly a sizeable 401K. And, he had no will. We’ve been through the process of probate and, because my brother never married, my mother is the primary beneficiary, with his siblings contingent. The original 401k was closed and a new inherited IRA was established with my Brother’s name ‘Estate’ and my name as executor. My mother has since been placed in a memory care for her chronic illness (dementia). She fits the profile for someone who could deduct her LTC costs due to her illness and needs. Until recently, her very high rent was paid using my brother’s insurance and old company retirement payout. Taxes were administered through the estate (re, retirement funds).

My problem is I must now start a distribution from his 401K to pay for my mother’s rent, and I was under the assumption that the funds would be sent directly to the Principal Beneficiary – Mom (Probate order). And we can then deduct her long-term care expenses in excess of 7.5%. The 401K company has not set the distribution this way. They are sending the funds to the estate which, I assume, will crush any hope of using a deduction. They are also tacking on 20% fed and 5% for state income taxes.

Looking for advice and information.
Thank you for your time.



Submitted by Alan - IRA critic on Wed, 2023-07-26 04:08

  • I think you made a misstatement about an inherited IRA because an estate inherited 401k can never be rolled over to an IRA under the tax code. Later, you seem to indicate that the funds are still in the inherited 401k, which makes sense. In almost all cases the 401k administrator would be pushing for a lump sum distribution to the estate, and I suspect that 18 months has passed only because there was a delay in establishing the estate EIN etc. The plan cannot distribute directly to mother since she is not the plan beneficiary, only the estate beneficiary. This would be different had this been an IRA all along, where you could have assigned the inherited IRA out of the estate to the estate beneficiary, but 401k plans will not accept such an assignment request from the executor. As such, passing with no beneficiary is more costly with an employer plan than with an IRA.
  • While they are not likely to agree, you might ask if half the balance can be held and distributed in January, as that would at least spread the taxes over 2 years. It’s a long shot though since it is already much later than they probably wanted to make the distribution. Another possibility would be to prepay as much of her bills as feasible (and still deductible), since most of them will be deductible. 
  • Therefore, there is no good solution to your concern. You can still pass through the distribution to mother on a K 1 with your estate 1041, and she will be taxed at her personal rate which will be less than the rates the estate would pay on amounts not passed through.

Submitted by Bill Anderson on Wed, 2023-07-26 12:38

Hello Alan,Thank you for your response.  We held off on any distributions from the 401k until my brother’s insurance and older retirement fund monies ran out.  We are now at the point we must take distributions to pay future rent.  The fund manager is fine with monthly distributions.  You mentioned pass through from the estate using a k1, would that get me to the point the estate is not responsible for any taxes and places the tax burden on my Mom.  She would claim these funds as income?Also, if this is a plausible route, should I talk to the fund manager about removing the taxes set to be taken from each distribution?  I ask because the taxes removed with each distribution, seems to me, would be attributed to the estate.  Or, is this a situation where the pass through (k1), and my mothers tax return (and medical deduction), would allow the estate to file for a refund at tax time.Thank you again for your time.Take care.

Submitted by Alan - IRA critic on Wed, 2023-07-26 15:00

  • It is very rare and fortunate that the 401k is not issuing a lump sum distribution with the estate beneficiary. Passing through the distributions from the 401k to your mother will result in her reporting the income and paying the taxes rather than the estate. Therefore, you should decline withholding from the distribution to the estate, as it is very onerous to transfer estate withholding to an estate beneficiary, but your mother may need to pay estimated payments if her deductions do not cover her income. You should be able to decline the withholding from the 401k to the estate because the distributions are NOT eligible rollover distributions which are subject to 20% withholding. 
  • Remember that the 401k is also responsible for meeting RMD requirements. If your brother passed after his RBD, the 401k RMDs are based on his remaining life expectancy from the single life table. You did not indicate his age. If he passed prior to RBD, the 5 year rule will apply. With the 5 year rule there are no annual RMDs in years 1-4, but a full distribution must be made in year 5 by 12/31/2027. Of course, these are minimums, you can always request more, but my concern is that the plan at some point may realize that they should be issuing a full distribution. 
  • If the estate is more complicated, you may wish to have a CPA file the 1041.

Submitted by Bill Anderson on Thu, 2023-07-27 01:20

Again, thank you Alan.  Although I’ve already worked the monthly distribution with the 401k manager, I will contact them about removing the tax withholdings.  I will also look into filing the 1041. Regarding RMD requirements, my Brother passed at age 59 and was not ready to take distributions.You’ve given me excellent information to move forward.  I can’t thank you enough.Take care. 

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