401(k) left to estate, want to have account split into inherited IRAs

Submitted by Mark Wilson on Thu, 2020-02-13 02:58

A client walks in my door with a 401(k) account that’s currently titled “The Estate of Bob Loblaw”. She told me her father named his estate as the beneficiary of his $750,000 401(k) account. UGH. Bob died in 2018 after his RBD.

In reading up on the topic (https://irahelp.com/slottreport/what-happens-when-estate-inherits-ira), I’m hoping we can have Fidelity directly roll the account into individual inherited IRAs for the four kids. Fidelity is saying they cannot do this. Otherwise, it’s my understanding that the remaining distributions (based on Bob’s remaining life expectancy) will be taxed at estate/trust rates.

Any thoughts? Any recommendations? Any access to a time machine so I can fix this before Bob died?

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Permalink Submitted by Alan - IRA critic on Thu, 2020-02-13 03:23

Problem is, there are more options for an estate inherited IRA than a qualified plan. The article describes an inherited IRA, not an inherited qualified plan.
A direct rollover to an inherited IRA of the estate or estate beneficiary is not permitted. Worse yet, the 401k plan is very likely to require a lump sum distribution to the estate. However, if the estate stays open, it may be worth the effort to see if the plan will make distributions over his remaining life expectancy. The estate can then pass the annual distributions through to the estate beneficiary and taxes will be paid on the beneficiary’s individual tax rate. That said, it is highly likely that a lump sum distribution will be made to the estate. If that happens, the estate can still pass it through on a K 1, but the entire distribution will be taxed in a single year.