Death of the owner/sole employee of a Profit Sharing plan.

[Guest gregens]

The owner/only employee of a sole proprietor business died with $200,000 in his Profit Sharing plan. His son is the sole beneficiary of the account. The plan document allows nonspouse beneficiaries to spread the payments over the life of the beneficiary. However, since the owner/plan sponsor is deceased does the plan have to now be terminated and the assets from the Profit Sharing account paid out to the son immediately?

[chris]

Probably, b/c the plan sponsor, ie, the sole-proprietor, has passed away. Would be similar to a corp. that was dissolved while it maintained a PSP...

[Ron Snyder]

Under the rules applicable to qualified plans:

1. The death benefit must either be paid out within 5 years or payments must begin within 12 months over the spouse's or beneficiary's lifetime;

2. The plan must terminate within a year unless another sponsor assumes responsibility for it;

3. The deceased's benefit will be paid to the surviving spouse unless the spouse has consented to appointment of a non-spouse beneficiary.

A solution that takes into account each of the foregoing requirements may permit payments to be made over the beneficiary's lifetime.

[mbozek]

There are three ways to avoid lump sum payout.

1. Have son continue as the sucessor owner of the business.

2. purchase an immediate annuity for life of the son.

3. If deceased owner had an IRA account with son as beneficiary, son could make a trustee to trustee transfer of PS plan benefits to IRA.

[Belgarath]

Mbozek - if you have time, could explain # 3 in more detail? I freely admit to being clueless on this one - what section of the regs permits this? And are there any special plan provisions or mechanics or special hoops that the son must jump through in order to utilize this? It sounds like this could be very beneficial in certain circumstances. Thanks!

[mbozek]

See PLR 9608042 for answer.

[Appleby]

# 2 seems like the viable option

Regarding # 3 ---Wasn’t PLR 9608042 issued to a spouse beneficiary? Generally, the IRS is more lenient with spouse that non-spouse beneficiaries regarding allowing unorthodox rollovers/transfers. Also, it would seem that the allowance was made in PLR 9608042 because the amount was an eligible rollover – which would not be the case for a non-spouse beneficiary--- Even then, you would be hard-press to find a Custodian who would allow a rollover to an IRA for a deceased person. Further, assuming this is even allowable, the son would have to be the designated beneficiary on the existing IRA for this to work.