Inherited 401K
i have a client who’s brother died approximately two years ago at age 58. Part of what he had was a 401K worth about $351K.
The primary beneficiaries are the parents age 84 and 83. The contingent beneficiaries are the sibling age 60, 58 and 48.
The 60 year old gets 50% and the other two get 25%
The money has not been moved yet and the current administrator has just recently been notified of the death.
The parents don’t have a big need for the money. My thought’s are to have the parents refuse the money and have it go the the siblings, dramatically reducing the RMD’s. Then if the children wanted to gift over to the parents funds they could do that.
My questions are. Thoughts on the strategy? and would it be to late to split the 401K to 3 separate IRA’s thus reducing the RMD’s further? Also what are the possible cost of making up a missed RMD?
Thanks
Brian
Permalink Submitted by mk foss on Sat, 2011-04-02 19:38
A disclaimer is the term used to refuse an inheritence. It’s supposed to occur within 9 months of the death of the original owner of the property. It’s too late to do a disclaimer.
Your dates are vague. if the original owner died in 2008, the first RMD would have been due the next year, or 2009. Since no RMDs were required for 2009, the first RMD should have been taken in 2010. The parents should take the RMDs as soon as possible and request a waiver of the 50% by attaching Form 5329 to their 2010 return. The waiver request should state that the missed RMD has been taken and the reason why it wasn’t taken on time.
The funds can be transferred to inherited IRAs for the parent-beneficiaries. It’s too late to use the life expectancy of a younger generation but the parents will want to name their children as beneficiaries. They can continue the percentage scheme for the original 401k contingent beneficiaries or treat their beneficiaries equally or even give everything to one child.
Permalink Submitted by Alan Spross on Sat, 2011-04-02 20:05
FIrst, the time limit for a qualified disclaimer has passed. It must be completed within 9 months from the date of death.
Therefore, the parents are going to have to take RMDs based on their shorter life expectancy, and the parents are the ones that may want to gift distributions to the children.
Chances are that only the 2010 RMD is delinquent. If the brother died in 2008, the first RMD year for the parents would be 2009 and RMDs were waived in 2009 by Congress. If brother died in 2009, same result for the first RMD year, but the age driven divisor would be different.
Hopefully, the plan did not have a mandatory 5 year rule in place since brother died prior to his RBD. A transfer to an inherited IRA only erases such a rule if done by the end of the year following the year of death, and it appears that this deadline also was missed. The parents could still transfer to an inherited IRA, but if the 5 year rule was mandatory for the plan, it will also be mandatory for the inherited IRA. Most likely however, the plan uses life expectancy as the RMD option, and the 2010 RMD would have to be made up ASAP and the 2011 RMD taken also before transferring to an inherited IRA. The parents only have about an 8 year RMD period, but that is better than 5 years.
The parent’s 2010 RMD divisor will be based on the oldest parent’s attained age in the year following the year of son’s death, and the divisor would be reduced by 1.0 each year thereafter. They cannot use both ages since separate accounts were not established by the deadline. The parent’s 2010 tax return should also include a Form 5329 for each parent requesting the IRS to waive the excess accumulation penalty for failing to take the 2010 RMD on time. They should take the 2010 RMD ASAP to show the IRS that the RMD situation was corrected as soon as the shortfall was noticed. The potential cost is 50% of the delinquent 2010 RMD, but the IRS has been lenient in granting penalty waivers.
Note that the parents also have the opportunity to convert the inherited 401k to an inherited Roth IRA after taking 2010 and 2011 RMDs if they wish to eliminate a tax bill for their heirs. This will take some planning due to the tax bill involved and who best to pay it and when. The parent’s tax bracket vrs those of the children should be considered. Another consideration is potential NUA benefits if the plan includes appreciated employer stock. Also, the plan may contain after tax contributions which would lower the tax bill for distributions.
Looks like a considerable amount of activity is required in a short time involving several people of interest.
The parents should also name their own successor beneficiaries ASAP to the current plan and for any inherited IRAs they create