Title & Transfer of Inherited IRA

Submitted by Mary Conte on Mon, 2017-08-21 22:04

Administrator of brothers estate–brother died without a will at 49 years of age & no bene for 401K.
TItled 401K : Estate of Brother (First & Last Name).

Estate 401K to be divided 1/3 1/3 1/3

The IRA COMPANY SAYS I can only withdraw as a full amount check payable to the estate after they withhold
20% federal tax + 2% state tax.

Can I just transfer this to 3 inherited IRA accounts (for 3 different beneficiaries?



Submitted by Alan - IRA critic on Mon, 2017-08-21 23:18

A direct rollover to an inherited IRA can only be done by a designated beneficiary or qualified trust beneficiary, not by an estate. The death benefit will have to be paid to the estate, and it is probably not likely that the 401k plan will allow that to be done in more than a single distribution. However, I do disagree about the mandatory withholding since that only applies to eligible rollover distributions and this distribution is not eligible for rollover. That said, when taxable distributions are distributed out of the estate to the beneficiaries it could create an underpayment problem if the value of the account is large enough. Beneficiaries may have to pay quarterly estimates.

Submitted by Mary Conte on Wed, 2017-08-23 19:31

ok. Can I possibly set up a separate bank account where the IRA dollar amount check is transferred, and then distribute that account shares of 1/3 1/3 1/3 for them to deposit in individual inherited IRA accounts?

Submitted by Alan - IRA critic on Wed, 2017-08-23 21:06

  • No, an inherited IRA account can only be funded by a direct trustee transfer from the plan so no IRA custodian should accept anything but a direct rollover check as a rollover contribution to an inherited IRA. Further, the plan will only issue a distribution check payable to the estate  and report it on a 1099R as a death distribution code 4 to the estate EIN, not coded as a direct rollover code G. Therefore, the IRS will expect to receive an estate 1041 reporting this 1099R income.
  • The applicable tax code Section is 402(c)(11) which the 401k plan should apply. This is copied below and clearly indicates that a direct rollover can only be done to the inherited IRA of a designated beneficiary. An estate is not considered to be a designated beneficiary, which is limited to individuals. There is an exception for trusts, but not estates.
  • 402(c)(11)If, with respect to any portion of a distribution from an eligible retirement plan described in paragraph (8)(B)(iii) of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee—(i)the transfer shall be treated as an eligible rollover distribution,(ii)the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and(iii)section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan.                       

Submitted by Mary Conte on Thu, 2017-08-24 20:51

So…If I get a court order which says the estate is supposed to be divided 3 ways and names the individual IRA plan…are there any options where:1.  Each named beneficiary in the court order pays the taxes? and can deposit this $ amount in an IRA?or2.  Do I need to have the probate tax lawyer file yet another tax return for the estate for 2017 for the 3 IRA accounts that were in my brothers name with no beneficiary listed?unless that designated beneficiary ……can be designated by the Court? 

Submitted by Alan - IRA critic on Fri, 2017-08-25 00:44

  • The intestate provisions of the state of the decedent will determine the actual beneficiaries of the estate. If the decedent had no spouse, parents or children alive it is very likely that the siblings would get an equal share. Not sure what evidence the probate court of jurisdiction will require for the estate administrator to distribute the 401k proceeds to these estate beneficiaries. While the estate will have to report the distribution on Form 1041, the taxable income can be passed through to the receiving beneficiary on Form K1 issued with the 1041. The IRS will then be looking for each beneficiary to report this income on their own 1040 form. There is no way that the distribution can be transferred to an inherited IRA under the tax code. 
  • Note that if an IRA had been inherited instead of a 401k plan, the IRA could be assigned by the estate administrator to the estate beneficiaries. But this is not possible with an inherited 401k and it is widely recognized that when an estate inherits a 401k there are no options available other than a taxable lump sum distribution in almost all cases. The plan wants to issue a check as soon as possible to the estate and let the estate administrator deal with it from there.
  • I am not clear if only a 401k was inherited by the estate of if there were also IRA accounts inherited. The situation is somewhat better for an estate inherited IRA than for an inherited 401k.

Submitted by Mary Conte on Mon, 2017-08-28 20:53

there are no children or spouse.  the father waiver his rights in the estate, and they were assigned to the 3 siblings.would the 401Ks plan be able to cut 3 checks,  payable to each beneficiary?  Is it possible to elect to have 10% withheld from each check in lieu of 20% for the lump sum.  Or should I just ask for the estate to get the check since it’s already August and the estate will have to pay taxes anyway as distribution hasn’t happened yet?  Since it looks as though there’s no way to roll the 401K plans over.there are 2 401K plans for sure and the decendent lived in California.

Submitted by Alan - IRA critic on Mon, 2017-08-28 23:42

The chance of the plan doing that is extremely slim. Plans want to avoid any possible liability arising out of estate settlements, but you can always ask them the question including the withholding question. There is no mandatory withholding here since the distribution is not eligible for rollover. For a distribution to the estate, while the estate must report the income on Form 1041, the estate can pass the taxes through to the beneficiaries of the estate. If the estate were to pay taxes the rate would be much higher than that of the individuals, so passing the taxable income through to the beneficiaries will save on taxes and will be much easier for the administrator. 

Submitted by Mary Conte on Tue, 2017-08-29 20:47

so I should be able to ask for 2 checks payable to the estate without any withholding and let the beneficiaries know they will have to pay taxes on this. 

Submitted by Alan - IRA critic on Tue, 2017-08-29 23:25

Only one check is needed for the lump sum distribution to the estate, but withholding can be declined because the distribution is not an eligible rollover distribution. But you might warn the estate beneficiaries that they may need to increase their own withholding or pay estimates for 9/15 and 1/15/2018 if they need to in order to avoid underpayment penalties.

Submitted by Ben Meyer on Thu, 2017-08-31 22:41

  • Possibly the 401(k) plans might agree to make a number of partial distributions over a 5 year period.  If they permit this it would even out the surge of income to be received by the  estate legatees.  The downside is that the estate would need to be kept open for that period.  
  • Since you say that there are two 401(k) plans, if neither would agree to a series of multiple distributions, you could arrange for one plan to make its lump sum distribution soon, and have the other plan wait to make its lump sum distribution until the next fiscal year begins for the estate.  That would allow the pass-through distributions from the estate to the legatees to be made in two different fiscal years of the estate, and therefore in two different tax years for the recipients.  This would provide some tax rate relief to the recipients by spreading the taxable income surge over two years. 

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