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Establishing a SEP after death


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A sole proprietor passes away and now the spouse is trying to get the finances in order. A question came up about setting up a SEP based on the income from the business before he died. I'm pretty sure that can't be done, but just in case, I thought I would get some back-up from other practitioners. Thanks for your help.

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Unless there's a cite that says it can NOT be done, I'd assume it CAN be done. Assuming that's the case, you have the secondary problem of getting the investment provider to accept the new application - it can be done; we've done it for participants who didn't complete them themselves. They (investment companies) can make themselves into real PITAs; don't accept the first "no" you hear.

Ed Snyder

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I found information that relates to IRAs, saying that

"After an IRA owner's death, his or her estate generally is unable to make a deductible contribution on his or her behalf (e.g., for purposes of the decedent's final income tax return), because an estate is not included in the list of persons eligible to establish or maintain an IRA. Thus, a decendent's final income tax return cannot show an IRA deduction unless the decedent actually had made such a contribution in the decendent's last taxable year."

I'm thinking that since a SEP is funded through an IRA, the same rule must apply.

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Unless there's a cite that says it can NOT be done, I'd assume it CAN be done. Assuming that's the case, you have the secondary problem of getting the investment provider to accept the new application - it can be done; we've done it for participants who didn't complete them themselves. They (investment companies) can make themselves into real PITAs; don't accept the first "no" you hear.

Bird,

I think it’s different for participants for reasons which include:

----There is guidance that says if the participant is unable to ( or refuses to ) sign the paperwork, the employer may do so on the participant’s behalf

----Contributions for the participant may be necessary so as not to disqualify contributions for other participants.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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I'm not sure that I'm right, but I think the only argument that proves it can't be done is something that says the estate cannot act for the sole proprietor to establish (and fund*) the plan. Clearly, if it were a corporation, the SEP could be established by the board of directors, and then all IRA accounts would have to be funded, whether the participants are living or deceased.

I know a sole proprietorship dies along with the owner, and the estate is limited in what it can do. But at the same time there are certain functions that it can do, otherwise you could never close out the business bank account, pay taxes, etc. I'm just not sure if this is one of those functions.

*It could boil down to discretion. For instance, if the plan exists already, and the sole proprietor/sponsor has already funded other participants' accounts to the tune of 10%, then I think that 10% would be owed to the owner's account as well. If the plan exists already, and no contributions at all have been funded for the year, it may not be possible for the estate to declare a contribution (but, I am quite sure the investment company won't reject checks in that scenario - not that it makes it right).

FWIW

Ed Snyder

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I'm just curious - will a bank/insurance company/mutual fund - whatever, allow a new SEP-IRA (which is in fact an IRA) to be established for a deceased person? I understand that a rollover in the name of the deceased is generally permitted, but I wondered about the restrictions for a new account? I don't know what various institutions out there will and won't allow.

Sorry - I hadn't read Bird's first post. Sounds like some will, some won't?

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I'm just curious - will a bank/insurance company/mutual fund - whatever, allow a new SEP-IRA (which is in fact an IRA) to be established for a deceased person? I understand that a rollover in the name of the deceased is generally permitted, but I wondered about the restrictions for a new account? I don't know what various institutions out there will and won't allow.

And supposing the IRA can be established post-mortem... no one can make a beneficiary designation for the deceased (powers of attorney cease at death), so it would then be the IRA's default language for who the beneficiary would be... in many cases the default beneficiary is the estate... this could create more trouble than it saves.

Another thought, might need to consult a probate attorney because, depending on how complicated the deceased's will is, some other heir could potentially contest the SEP as a manipulation of the estate's assets for one heir's gain over another.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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While the IRS position is that contributions to a tax deductible IRA type retirement plan cannot be made after the death of the taxpayer (PLR 8527083), the federal courts have a different opinion. In Gunther v.US, 573 FSupp 126 (1982), a taxpayer who received a a lump sum distribution died before the funds could be rolled over. The personal representive of the taxpayer's estate rolled the funds over to an IRA within 60 days after the date of the distribution. The IRS denied the rollover and imposed taxes and interest of $73,000 on the spouse claiming that the right to a rollover under IRC 402(a)(5) was personal to the employee and could not be exercised by another person. The federal court allowed the rollover because IRC 6903(a) provides that a fiduciary for a taxpayer, which includes a personal representative, shall assume all rights, powers, duties and privileges of the taxpayer in respect to a tax imposed under the IRC except to the extent specifically provided. The court held that nothing in IRC 402(a)(5) prevented another person from exercising the right of a taxpayer to rollover the distribution.

So the question is whether the right to contribute to a SEP is specifically restricted to the deceased taxpayer. Obviously if the deceased earned income from personal services for the tax year prior to his death he would be eligible to make a SEP contribution.

The estate distribution aspects of the contribution (assuming there is no designated beneficiary) are no different than any other asset acquired by the estate after the death of the rightful owner (e.g., right to a settlement or judgment) which will be disposed of under the will or state law.

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The CIP rules must also be considered. While they are waived for IRAs established to receive automatic rollovers, I am not aware that they would be waived in such a case. Maybe someone else who handles the compliance aspects of new accounts can address that ?

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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