self employed person dies
I attend a Seymour Goldberg lecture – five-ten years ago in which he cited a rule that if a self employed person dies, the self employed retirement plan is considered terminated within a reasonable time and the benefits are distributed immediately. No rollover, no stretch. I believe the law is changed now but the case I am looking at involved death in year 1996. What is the cite or source of this law? Does the law now differ from the law that was in place in year 1996?
Thanks
Jim M
Permalink Submitted by Alan Spross on Fri, 2011-11-25 20:43
Jim,
It may be difficult to determine the actual terms of the plan, since plans were allowed to be more restrictive than the IRS rules allowed. The major changes since the 90s were the 2002 RMD regs which changed the default rule for RMDs from the 5 year rule to life expectancy when a plan owner passed prior to the RBD. Then, after 2006, a non spouse beneficiary was allowed to transfer the funds to an inherited IRA. I believe that a spousal beneficiary in 1996 was still allowed to roll the plan over to an IRA.
Who is the beneficiary of this plan, and did owner pass prior to the required beginning date?
Permalink Submitted by Bruce Steiner on Fri, 2011-11-25 21:36
If the benefits were payable to the spouse, the spouse could roll them over.
I think Sy’s concern was that if the benefits were payable to someone other than the spouse, once the self-employed person died, there was no longer a plan sponsor, so that even if the beneficiary could otherwise stretch out the benefits, it would not be possible to continue the plan. However, there were several workarounds.
One possibility is for the plan to purchase an annuity and distribute it to the beneficiary. This was the case in PLR 200244023. I spoke with the lawyer whose client this was at the time, and she said that the IRS would not rule on whether the plan could be continued for the beneficiary’s lifetime after the death of the self-employed person, so the annuity was the backup choice. The annuity is not perfect, since there is an economic cost to an annuity, as well as a loss of flexibility. However, it preserves the stretch.
At least one other lawyer has suggested that it might be possible to have someone else continue the business and take over the plan. I have not researched this.
Since 1996, the law has been changed to allow a nonspouse beneficiary of a qualified plan can transfer the benefits to an inherited IRA. This would avoid the problem.
Before it was possible for a nonspouse beneficiary to transfer the benefits to an inherited IRA, a self-employed person with a large retirement benefit and a beneficiary other than the spouse would form a corporation or LLC so as to avoid this problem at death.
Permalink Submitted by mk foss on Sat, 2011-11-26 19:20
Bruce was referring to the law change in [b]2006[/b] that allowed the nonspouse “rollover”. The situtation that Sy described can still be a problem to this day. One of my clients’ beneficiary was a special needs child; it would be a problem if he retained the corporate plan for his professional corporation because he was th only shareholder and the practice was unlikely to contnue after his death. The solution was to amend the corporate plan to allow in-service distributions. Then he withdrew most of the plan assets and rolled them over to an IRA. He kept the corporate plan (a solo 401k) because he could make larger contributions than with a SEP and periodically rolled sums into the IRA. The other advantage was that keeping the assets low removed the requirement for filing 5500-EZ forms.
A qualifying trust can be the “designated beneficary” for a qualified plan under the nonspouse rollover rules, which is a plus for individuals who do not have a spouse to name and want some control over distributions after their death.