Inherited IRA from a Person who died without beneficiaries

Submitted by Brian Matter on Wed, 2024-01-24 00:27

Trying to figure out what timeframe applies to an inherited IRA. Here is the fact pattern:

– My client Jane had a sister Sam who died unexpectedly at age 60.
– Sam died on July 10, 2021.
– Sam had two 401(k)s and NO listed beneficiaries on the 401(k)s. Sam had no husband or children. Sam also did not have an estate plan so everything is going through probate.
– Jane (72) was 12 years older then Sam when Sam died.
– The courts are still in the process of settling Sam’s estate, but it appears likely that Jane and her brother will receive 50% of each 401(k) into an inherited IRA.

My questions are:

– Who is the beneficiary? Is it considered the estate or is it considered Jane and her brother because that is what the court has decided?
– If the beneficiary is determined to be the estate, then it would seem that the estate would not be an eligible designated beneficiary. Would that then require the 5 year rule to empty the inherited IRA by the end of the 5th year for both Jane and her brother?
– If it is the 5 year rule, is it 5 years from date of death, or from when the beneficiary finally receives the funds from probate?
– If it does fall under the 5 year rule, would there be required minimum distributions for Jane and her brother as well along the way, or no RMDs required?
– If it is not the 5 year rule, what would be the reasoning based on the fact pattern above which would make this happen under 10 years or stretch IRA?

Thanks for any guidance anyone can provide. I’m going around and around with a CPA who thinks everything should just fall under the 10 year distribution window and doesn’t think RMDs are required so trying to confirm what the rules are since there seems to be a lot of confusion.



Submitted by David Mertz on Wed, 2024-01-24 00:56

  • The 401(k) plans will indicate the default beneficiary, in this case almost certainly Sam’s estate, so the remainder of this reply will assume that the estate is the default beneficiary.
  • A rollover to in inherited IRA can only be done for the benefit of a designated beneficiary, a designated beneficiary must be an individual and an estate is not an individual, so no rollover to an inherited IRA is permitted.  The 401(k)s can only be distributed to the estate and then the estate can distribute the funds to the beneficiaries of the estate with the estate typically passing the taxable income through to the estate beneficiaries on Schedules K-1.
  • Because the 401(k)s must be distributed to the estate, the only way to spread the tax consequences over multiple tax years would be for the estate to take partial distributions from the 401(k)s, plans permitting, keeping the estate open over multiple tax years to be able to receive the distributions.
  • Because Sam died before her required beginning date for RMDs and the estate is the beneficiary, the 5-year rule applies.  The 401(k)s must be fully distributed to the estate by the end of 2026 with no requirement for annual RMDs.
  • Again, under the circumstances there can be no inherited IRAs created with the funds from the 401(k)s, only distributions paid to the estate.  Such is the inevitable undesirable result when there are no designated beneficiaries of a 401(k).

Submitted by Brian Matter on Wed, 2024-01-24 01:20

Thank you!

Submitted by Brian Matter on Wed, 2024-01-24 01:20

Thank you!

Submitted by Alan - IRA critic on Wed, 2024-01-24 01:42

  • A 401k inherited by an estate will normally make a lump sum distribution to the estate. The tax code does not allow these funds to be directly rolled into an inherited IRA. That’s only possible if individual beneficiaries or a qualified trust were named as beneficiaries. The court has approved the estate beneficiaries under the intestate law of the applicable state. That does not make them designated beneficiaries. While the 5 year rule applies, a lump sum distribution to the estate terminates the use of the remaining 5 year period. It’s not clear why the LSD has not already been issued, but it’s probably related to a delay in establishing the estate and providing the plan with an EIN, under which the 1099R will be issued.
  • There are no annual RMDs in years 1-4 of the 5 year rule period. The 10 year rule never applies to estates. The estate will have to file a 1041 to report distributions from the 401k. Those distributions should be applied to cover estate expenses and remaining amounts can be passed through to the two estate beneficiaries on a K 1 and those beneficiaries must report the K 1 income on their personal returns.

Submitted by Brian Matter on Wed, 2024-01-24 23:19

Thanks for your response.  I have a follow up for you based on looking at a handout one of our team members received when Ed Slott presented at the AICPA conference a few years ago.  This was the example: Death before the RBD – 5-Year Rule”Allen dies at age 65 (before his RBD) and leaves his IRA to his estate (a non-designated beneficiary). Allen’s son, David, age 40, inherits through the estate so he is a non-designated beneficiary. RMDs to David would be based on the 5-year rule. The entire inherited IRA account balance must be withdrawn by the end of the 5th year after Allen’s death.” I’m trying to reconcile the comment about estates having to make a lump sum distribution compared to this example where the estate receives it adn then his son inheirtes it through the estate.  Any thoughts to clarify would be appreciated.

Submitted by Alan - IRA critic on Wed, 2024-01-24 23:40

  • The tax code allows the 5 year rule, which is fine if the inherited account is an IRA. However, when a qualified plan (QRP) is inherited by an estate, there is no way for the estate beneficiaries to move the funds into an inherited IRA, leaving the QRP in place. However, the vast majority of QRPs include operating procedures that result in a lump sum distribution being made to the estate as soon as practical (plan probably needs to supplied with the estate EIN first). This quick LSD allows the plan to divest the balance before any estate related litigation can be filed, but also allows the estate to be closed, rather than staying open for 5 years to receive 5 year rule distributions. It can’t hurt for the executor to request an extra year or two from the plan, but the plan will likely not comply. 
  • Therefore, the QRPs are not willing to extend the payout time for estates, and this policy extends beyond the 5 year rule, plans are also making lump sum distributions to estates where the participant passed post RBD as this situation is even more unpleasant for the plan because distributions over the remaining LE of the participant may go on for much longer than 5 years. 
  • Failure to name a living beneficiary or charity on a QRP is therefore much worse than failing to name a beneficiary on an IRA because IRA custodians cannot force out distributions like a QRP can. Further an inherited IRA can be assigned out of the estate to the estate beneficiaries by the executor, although a few of them resist cooperating. QRPs do not accept assignment into separate internal accounts for each beneficiary, and of course that is not even relevant if the plan rushes out a total distribution to the estate.

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