Profit Sharing Plan of Deceased

Submitted by Robert A Petersen on Fri, 2017-03-10 15:02

A client passed away at age 69. Each year he was taking a distribution from his former employers profit sharing (qualified) plan. His beneficiaries were both of his prior deceased parents. Never updated. Under his will, his brother was the beneficiary.

The lawyer of the estate has called me to ask if the profit sharing plan can be direct transferred to the estate and once the estate is settled do a direct transfer to the brother.

We are trying to avoid a lump sum distribution since the value of the plan is about $270,000 and the tax impact is high.

Can the first RMD be taken from the estate and then lump sum direct transfer to brother’s IRA when settled or does the estate have to remain open forever or is this plan not eligible for RMD since the brother is only the beneficiary in the will?

It appears that the plan is pushing the lawyer to make a decision on lump sum distribution taxable entirely on the 1099-R or take RMD’s directly to the estate account.

Appreciate your help. My phone number is 973-696-6373.

Bob Petersen



Submitted by Robert A Petersen on Fri, 2017-03-10 15:06

Help

Submitted by Robert A Petersen on Fri, 2017-03-10 15:08

Help

Submitted by Robert A Petersen on Fri, 2017-03-10 15:10

A client passed away at age 69. Each year he was taking a distribution from his former employers profit sharing (qualified) plan. His beneficiaries were both of his prior deceased parents. Never updated. Under his will, his brother was the beneficiary.The lawyer of the estate has called me to ask if the profit sharing plan can be direct transferred to the estate and once the estate is settled do a direct transfer to the brother.We are trying to avoid a lump sum distribution since the value of the plan is about $270,000 and the tax impact is high.Can the first RMD be taken from the estate and then lump sum direct transfer to brother’s IRA when settled or does the estate have to remain open forever or is this plan not eligible for RMD since the brother is only the beneficiary in the will?It appears that the plan is pushing the lawyer to make a decision on lump sum distribution taxable entirely on the 1099-R or take RMD’s directly to the estate account.Appreciate your help. My phone number is 973-696-6373.Bob Petersen

Submitted by Alan - IRA critic on Fri, 2017-03-10 16:05

I assume he was not married at the time of his death. Once the plan clarifies that his estate is the default beneficiary, the estate will receive any distributions including RMDs under the 5 year rule. However, Sec 829 of the PPA enabled a direct rollover to an inherited IRA of a non spouse beneficiary, but ONLY if that beneficiary was a designated beneficiary or beneficiary of a qualified trust. In this situation, since the estate is NOT a designated beneficiary, a direct rollover to the beneficiary under decedent’s will is not allowed. In many such cases, the plan provisions require a lump sum distribution, but if the plan is willing to make distributions to the estate under the 5 year rule and if the estate is willing to remain open for the 5-6 years, the tax liability of a lump sum distribution can be avoided. Under the 5 year rule, there is NO annual RMD and the only requirement is that the plan balance be fully distributed by the end of the 5th year after the year of participant’s death. Distributions made to the estate can be passed through on a K 1 to the will beneficiary and reported at that beneficiary’s marginal tax rate, which is bound to be lower than the estate tax rate.  This is the best possible outcome if the plan will make discretionery distributions to the estate as requested over this period.

Submitted by Ben Meyer on Mon, 2017-03-13 04:19

  • Alan, it seems that the rule of PPA-2006 section 829 (new IRC section 402(c)(11)) permits a direct rollover from an eligible retirement plan (not an IRA) to an inherited IRA of a designated beneficiary, but NOT to an inherited IRA titled to an estate, since an estate is not a designated beneficiary.  Does this mean that the eligible retirement plan is permitted to maintain the account in the plan for the duration of the 5-year distribution period if they are willing?  How would the account in the plan be retitled for the 5-year payment period?
  • This seems to be distinguishable from a situation where an IRA, rather than an eligible retirement plan, has an estate as a beneficiary.  For this situation there have been several discussions on this website describing how the account may be transferred to an inherited IRA to allow the estate to be closed.  The distribution period in such a case would be either a 5-year distribution period, for death prior to RBD, or over the remaining life expectancy of the decedent if the death is on or after the RBD.  This was also the subject of the posting by Natalie Choate “Here is how to transfer an inherited IRA that is payable to the estate (or trust) OUT of the estate…”.
  • So the difficulty when an estate is the beneficiary of an eligible retirement plan described in section 402(c)(11) is that there is no way that the account can be transferred anywhere.  The result is that the account can only be distributed as permitted by the terms of the original plan.  Does this harsh result seem correct?

Submitted by Alan - IRA critic on Mon, 2017-03-13 17:43

  • Plan would retitle showing estate as beneficiary once provided with the death cert and other paperwork such as the estate’s EIN. The plan may also have internal procedures such that a lump sum is distributed to estate beneficiaries, which is probably more likely than not since many plans prefer to distribute inherited plan balances sooner rather than later and avoid the risks of complicated estates that end up in litigation of some sort.
  • Yes, the difference here is that a non IRA plan with an estate beneficiary cannot be assigned to an inherited IRA even if the plan wanted to divest themselves of the account by that means. An IRA custodian likely would not even open such an account. Some balk even for inherited IRAs as noted in Choate’s articles.
  • Yes, I think you summarized the situation well. You probably cannot pull up this Choate article on this specific situation without a Morningstar account, but here is the link to her article:  http://www.morningstar.com/advisor/t/93123895/estate-as-beneficiary-ira-vs-qualified-plan.htm?

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