403(b) paid to estate?
Hi, I’m new here. I learned of this site from bogleheads.org, where I was told this was the best place for my question.
My mother passed away in March, had a 403(b) annuity listing my father as beneficiary, with no secondary beneficiary. I was trying to figure out how my father should take it, but he just passed away also. The annuity documents say that, if the beneficiary dies before the owner, the assets will be paid out to the owner’s estate. I am the only child and now only heir of my parents.
My question: are there any options here? If not, and the annuity must be cashed out, who owes the income taxes on it? Can my mother’s estate pay these, at her rate, or do I have to pay them at my rate?
I know I need a tax pro to help, but I’d like to get some preliminary advice here if I can.
Thanks for any help anyone can give!
Permalink Submitted by Alan Spross on Wed, 2008-07-09 23:34
Sorry to hear of these losses.
But your post indicated the 403b beneficiary passed AFTER the owner, not before, so your statement about the annuity document does not seem to apply.
What was your mother’s age at her death? Was she still working for the 403b sponsor? Did your father name you as successor beneficiary before he passed, or are you inheriting this through his estate?
Given enough detail, we should be able to narrow down your options.
Permalink Submitted by Mark Srednicki on Wed, 2008-07-09 23:48
OK, more detail! My mother and father were both 85, both long retired and my mother taking distributions from her 403(b) annuity; it’s current value is high 5 figures. The annuity names my father as beneficiary; no other beneficiaries of any kind (second, contingent, primary, whatever) are named.
When my mother died in March of this year, I reported it to the annuity company, which sent back paperwork asking which of the following 27 ways did my dad want to take it? I put that issue on the back burner and did not make a decision. My dad never signed the papers. (I’ve been managing all my dad’s affairs since my mom’s death.)
Meanwhile, after my mom’s death, I had a living trust set up for my dad, which has a pour-over will to go with it. I am both the trustee and sole beneficiary of his trust. My mom had no trust and a will that left everything to my dad, and then to me if she outlived him. That will has not yet been probated. (My dad died the morning of the day he was going to sign the probate papers.)
Now that my dad has died, I’m very confused about the status of my mom’s annuity, and what the options are.
I’m seeing my lawyer in a couple days, but she was not willing to give advice earlier on how my dad should take the annuity, so I think I need more help.
Thanks!
Permalink Submitted by Alan Spross on Thu, 2008-07-10 02:07
You are in complex territory here. Let’s break this down into two segments:
1) Who or what entity the IRA is paid to
2) The RMD schedule that must apply to the IRA
1) Your father was designated beneficiary, but he died prior to naming a successor beneficiary on the plan agreement. Therefore, the plan provision will probably provide for payment of the plan balance to your father’s estate.
1a.) The RLT included a pour over will that should have rescinded any prior will your Dad had, and provide that assets payable to his estate should be paid to the trust, which is now irrevocable. Therefore, when the pour over is probated, the result is that the plan RMDs or other distributions will be paid to the trust and from there be distributed (by you) according to the trust provisions.
2) Since your father died prior to Sept 30th of the year following your mother’s death. the following portion of the IRS Regs applies:
>>>>>>>>>>>
(c) Deceased beneficiary. For purposes of this A–4, an individual who is a beneficiary as of the date of the employee’s death and dies prior to September 30 of the calendar year following the calendar year of the employee’s death without disclaiming continues to be treated as a beneficiary as of the September 30 of the calendar year following the calendar year of the employee’s death in determining the employee’s designated beneficiary for purposes of determining the distribution period for required minimum distributions after the employee’s death, without regard to the identity of the successor beneficiary who is entitled to distributions as the beneficiary of the deceased beneficiary.
>>>>> >>>>>>
What all this means is that the RMD must be paid to the trust as long as the trust remains in existence. The RMD will be based on the remaining single life expectancy of your father. If he would have reached 86 next year, the RMD divisor applied to the 12/31/08 balance will be 7.1 and that divisor will be reduced by 1.0 each successive year. In other words, the plan would need to be totally distributed in 7 years.
The trust would normally issue a K1 and pass the distributions through to you to be taxed at your marginal tax rate. Therefore, it is to your advantage to stretch out the distributions for the full 7 years unless you really need the money sooner.
Finally, any RMD not taken by your mother for 2008 needs to be taken from the plan prior to 12/31/08. The next RMD is due by 12/31/09.
You will need to get an EIN for the trust, now that it is irrevocable and can no longer use your Dad’s SSN.
Permalink Submitted by Mark Srednicki on Thu, 2008-07-10 02:35
Alan, thanks very much, that was very clear. I’ve already gotten an EIN for the trust. Having the annuity pay out over 7 years is not so bad; I would have preferred to have the RMDs based on my age (53), but as long as I don’t have to take it all as a lump sum, I’m not going to complain.