Father Dies Before Wife’s 457 Plan Could be Rolled into his IRA

Submitted by Mark Struthers on Fri, 2023-10-06 16:36

My mom had a 457 plan with her spouse, my dad, as primary and her trust as secondary. She died, and a few months later, he did. There was no time for me to be appointed as personal rep (probate) and move the account into his IRA. Nationwide said that it can’t go to her trust since he was still alive when she passed. It has to go into an estate-owned 457. And because the estate is a non-designated beneficiary, it can’t be rolled into an estate-owned inherited IRA.
My questions:
1) Does it make sense that it can’t go into the trust? I guess I understand that that might be correct, but it is frustrating because she did “designate” a beneficiary – a primary and a secondary.
2) Please confirm that the estate-owned 457 it can’t be rolled into an estate-owned inherited IRA – which seems to be the case with all the other posts but want to be sure
3) If I was so inclined, I could leave it with Nationwide for 5 years, but I would have to have RMD? The RMDs would be based on his or her RMD schedule? I would assume his since it is his estate.
4) And I assume that even though this is a designated beneficiary because the estate will be distributing the money to the beneficiaries, the beneficiaries are each responsible for the taxes.
5) Nationwide forced me to take the RMD from the 457 when the ownership was changed to the estate owned 457, even though from what I have seen the IRS gave a break to IRAs for RMDs for 2022 and 2023 – why not 457 plans?
6) Hypothetical – If the funds had been in an IRA, the estate was the beneficiary – a non-designated beneficiary. Would I still be prohibited from putting the funds into an estate-owned inherited IRA and then distributing them to the inherited IRAs for the beneficiaries of the estate? And each beneficiary would then have discretion as to when to take the tax hit.

Thanks for any help!
Mark



Submitted by Alan - IRA critic on Fri, 2023-10-06 17:29

  1. A contingent beneficiary (trust) is voided upon the owner’s death if the primary is still living, as was the case here. If still within 9 months of Mom’s death, it might be possible for you as PR of dad to disclaim the IRA on dad’s behalf, resulting in the plan passing to the trust because a disclaimer would result in Dad being treated as pre deceasing Mom.  However, it sounds like the 9 months has probably expired.
  2. That’s correct. A direct rollover to an inherited IRA is only possible for a designated beneficiary, not for an estate. 
  3. Once an estate inherits an employer plan, the result is almost always a lump sum distribution to the estate. The plan will want to distribute the balance ASAP, so it’s surprising that they have not so indicated yet. Therefore, the IRS RMD schedule that would otherwise have applied becomes a moot point in most cases. You probably want not want to keep his estate open for several years anyway. The IRS RMD rule that would otherwise apply if a lump sum can be avoided is based on whether Dad passed prior to his RMD beginning date or after.
  4. Once the plan balance is distributed and estate expenses paid, the remaining balance can be distributed out of the estate to the estate beneficiaries, but they are not treated as designated beneficiaries. The estate must apply for an EIN, file Form 1041, and the 1041 will issue a K 1 reporting distributions made to beneficiaries, who will then report this income on their personal return. 
  5. What years are you referring to? What was her DOD and his DOD?  The IRS waiver of certain beneficiary RMDs for 2021-2023 does apply to these plans, but only applies to certain RMDs for designated beneficiaries, not to estates. Perhaps the distribution already made was the year of death RMD, but it’s surprising the plan did not just make the total distribution which would have satisfied the year of death RMD. Not sure if the year of death RMD was late or not, not knowing the applicable dates. 
  6. Yes, passing without a designated beneficiary has more severe results when the plan is a non IRA plan because as indicated above, there is no way to get the funds into an inherited IRA and most plans will want to distribute a lump sum. If Dad instead had an IRA and left that to the estate, you could assign the balance out of the IRA to inherited IRAs for the estate beneficiaries who could then manage their own inherited IRAs – however, this would NOT extend the IRS distribution period but the lump sum distribution would be avoided and the IRS allowed RMD rules would have applied. The estate could also be closed in a normal manner. If Dad passed after his RBD, the distribution period would have been based on his remaining life expectancy.


Add new comment

Log in or register to post comments