Custodian made check payable to deceased spouse’s estate

Submitted by Warren DeNardo on Mon, 2023-09-25 18:04

Facts:
Mary has 403b since 3/85. Named her mother as benny, and then marries Bill a couple of months later. Mary neglected to update her beneficiaries…..

Mary passes in 2022. Custodian of 403b is MM. MM refuses to do anything other than name Mary’s estate in paying out the full 403b proceeds. (they claim their default position is naming the estate as benny in the event there is no named benny)

Proceeds are 400k……
Thank you in advance.
WD



Submitted by Alan - IRA critic on Mon, 2023-09-25 19:31

Was she still married to Bill when she passed?  If so, this must be a non ERISA 403b since an ERISA 403b would have to treat the spouse as the beneficiary whether named or not. And if a non ERISA plan, was her mother still living when Mary passed?



Submitted by Warren DeNardo on Mon, 2023-09-25 19:42

She was still married to bill when she passed.  it is my understanding she began plan in 3/85… cant be totally sure…Mary’s mother was deceased prior to Mary’s passing…..



Submitted by Warren DeNardo on Mon, 2023-09-25 19:51

in calling the mm sponsor the plan was opened as a non Erisa plan….



Submitted by Alan - IRA critic on Mon, 2023-09-25 20:22

OK that makes sense. And it’s very typical that an estate beneficiary will generate a lump sum distribution from the plan even when RMD rules do not require it. Hopefully, there is a will showing Bill as beneficiary, and if not he will eventually receive the proceeds under intestate laws, but 400k will generate a large tax bill passed through to him. 



Submitted by Warren DeNardo on Fri, 2023-09-29 17:35

interesting update: we are being told from a tax professional an IRA account can be opened in the same name as the estate of the deceased wife.  Thus essentially avoiding immediate taxation of the 403b distribution which was made payable to the estate.  It would appear that since she had already attained RBD, distributions would be calculated from her single life expectancy.  Since i have never seen this in 40 years, and this “rollover” option wasnt pointed out above in the previous dialog, is something being missed here? or are the taxes being paid in this situation at such confiscatory rates that it would make little difference?



Submitted by Alan - IRA critic on Fri, 2023-09-29 18:41

  • A direct rollover to an estate is not an option per Sec 402(c)(11) of the tax code. That suggestion is incorrect for two reasons. First, if the distribution has already been made to the estate, it cannot be rolled over. Second, if there has been no distribution yet, an inherited IRA opened for the estate cannot receive a direct rollover from the plan per 402(c)(11). That option is only available for designated beneficiaries of a plan, which are named individuals or a plan beneficiary provision that states which individuals will inherit if none were named.
  • A distribution to the estate does not necessarily mean that taxes will be due at the high estate rates. The estate can pass through the income to the beneficiaries of the estate (will or intestate) on Form K1 and those individuals will then report the income and pay taxes on their personal returns. That said, even a lump sum distribution of this size will be taxed in the higher tax brackets of those individuals.
  • If the spouse is the sole beneficiary of the estate, it may be possible to secure a PLR from the IRS allowing a rollover, but PLRs are very expensive and time consuming.

 



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