Mom inheriting my Dads ESOP (they were not married)

Submitted by David King on Fri, 2023-01-27 16:40

My Mom is the beneficiary of my Dads ESOP (they were never legally married, this is in Maryland). Because of this, I am told she cannot do a direct rollover to her own IRA account, and would need to take a lump sum distribution. She is not inheriting his IRA account (which was empty and had no beneficiaries listed). They lived together 30 years and always assumed they were common lawed.

She is 62, 100% disabled, and is on SSDI as her only income. She currently does not have a 401k or IRA. Is there a way for her to do a direct rollover and not be taxed? Would it be better to disclaim the ESOP, have is pass to my brother and I, and then we can do a roth ladder and “gift” her money each year?



Submitted by Alan - IRA critic on Fri, 2023-01-27 17:19

Your comment regarding a disclaimer suggests that there was no beneficiary named on the ESOP, and Dad’s estate would therefore inherit it. Is that correct, and what was Dad’s age at death?



Submitted by David King on Fri, 2023-01-27 17:28

My dad was 65. He had my mom listed as the beneficiary.I brought up disclaiming the ESOP because that’s the only way I can think of that we could get her that money without a significant tax burden. My thinking was that she could deny the inheritance, the ESOP would pass to my brother and I tax deferred. And then we would do a roth conversion ladder each year (waiting 5 years to withdrawl of course), and then “gift” that money to her. The taxes my brother and I would pay on this conversion would be much less than what she would pay taking a lump sum, plus the 10% Maryland inheritance tax.



Submitted by Alan - IRA critic on Fri, 2023-01-27 18:17

  • If she disclaims and you were not named as contingent beneficiaries the ESOP would be inherited by Dad’s estate, and because he passed prior to his RBD, the 5 year rule would apply. Were you named as beneficiaries in Dad’s will? The ESOP could not be rolled over to an inherited IRA for the beneficiaries of his estate nor could an inherited Roth conversion be done, and the plan would likely require a lump sum distribution. If the employer shares are highly appreciated, a distribution to his estate could utilize NUA (net unrealized appreciation) for which the gains on these shares would be taxed at the lower LT cap gain rates.
  • If she did not disclaim since she was not more than 10 years younger than Dad, she would be an eligible designated beneficiary (EDB), could do a direct rollover to an inherited IRA and take modest life expectancy RMDs each year or have the ESOP distributed as a taxable distribution and use the LT Cap gain rates on the appreciation.  Current taxes would only be due on the cost basis of the shares.


Submitted by David King on Fri, 2023-01-27 19:24

He did not have a will. And just so I am understanding this correctly, if the ESOP passed to the estate, my brother and I would then need to take a lump sum, rather than rolling it over to our own IRA? He did have a Roth IRA that he cleared out (had $0) with no beneficiaries listed. If disclaiming would mean we’d still be taking a lump sum, maybe that’s not a good option. She is also not inheriting the IRA mentioned above, hense why I don’t believe she can do a direct roll over. The distribution will be in cash. So far as I know, that will be ordinary income rates.So it seems if I’m follow you here, she may be stuck paying ordinary income on the cash distribution, and maybe our best bet to reduce the tax burden would be to take distribution via several payments rather than 1 lump sum.



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