5 year Plan distributions to Estate
Client, age 50 died. No beneficiary for Retirement plan. By default Estate is apparently the beneficiary and must payout the entire plan benefits within 5 years. Estate is open in the state of Residency. Many state statutes encourage Estate to be closed within 1 year of opening the Estate. No reason to keep the Estate open other than to receive plan distributions.
Administratively, preference is NOT to have the Estate open for 5 years simply to receive plan distributions. Filing annual Estate Form 1041, with income and distributions to Estate Beneficiaries. Estate Beneficiaries are elderly parents of the deceased.
Any thoughts on avoidance of the 5 year payout, other than take distribution of all of the plan funds in one tax year? Any possibility of a distribution to inherited IRAs for the beneficiaries and then payout the funds over the 5 years to the beneficiaries?
Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 18:06
What type of retirement plan was inherited?
Permalink Submitted by Gregory C Smith on Thu, 2022-03-03 18:12
401( a ) as I recall. From a University.
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 18:37
Unfortunately, without a designated beneficiary or default non estate beneficiary for the plan, the balance is not eligible for direct rollover to an inherited IRA per the tax code. Actually, in most such cases a lump sum distribution to the estate will be required by the plan, but keeping the estate open to receive 5 years of distributions is not a good result either. It’s a matter of one less optimal plan or the other.
Permalink Submitted by Bruce Steiner on Sun, 2022-03-20 02:53
It often takes much more than a year to administer an estate. Most take a couple of years. I had one that took over 20 years until the estate taxes were resolved. If there’s a tax benefit to taking distributions over 5 years, the tax benefit may outweigh the cost of the additional income tax returns.