Beneficiary Problem

[Guest snmhanson]

I am working with a client on an inheritance from a 401K/ESOP plan and have run into a bit of a problem. The clients mother who is the original owner of the account died about ten years ago. Client's father was primary beneficiary with the client and client's sister as contingent. Father never took ownership of the account and it sat for the last ten years registered to her deceased mother. Client's father passed away last year and we are trying to get the assets to the sisters, preferably in an inherited IRA. I am pretty sure the plan sponsor will issue a check made out to whomever we request, but I'm not sure if we would be exposing ourselves to taxes and penalties if we took that route. Here is my thought process on it:

It seems that the correct path might be to assume that the assets belong to the father in an IRA even though he never changed the registration on the account. There would be no named beneficiaries on the fathers "account" so the assets would now pass to his estate. In that case they would need to go through probate to determine who they will ultimately go to - which I am sure would be the daughters. If that is the case the IRA would have to be distributed over a maximum of five years, though I think they would probably just take the cash and pay the taxes. This seems like quite a hassle considering the account value is around $30K.

The other possibility is to say that the father waived his right to benefits at the time of the mother's death. In this situation the daughters would have inherited the funds ten years ago and either would have had to pay taxes on them at that time if they took a distribution, or rolled them into an inherited IRA where they should have been taking distributions from the account over the last ten years. In the latter assumption there would conceivably be taxes and penalties due for not taking the required distributions on time.

The final scenario that I could consider is that the account constructively went to the father at the time of the mothers death, even though the registration was never changed. At that time the daughters essentially became the primary beneficiaries since the original primary beneficiary now owns the account and there were no other changes made. Obviously this would be the best scenario and I would argue that this is basically what would have happened had they gone through the proper procedures when the mother died ten years ago.

Anyone care to chime in with what our options are? I am hoping that an inherited IRA can be set up for each daughter and we can call it good. However, I don't want them to get into trouble if that is not the correct course of action.

Thanks!

[My 2 cents]

More questions than answers here:

Notwithstanding the fact that the father never put in any sort of claim on the account, wouldn't it be a slam dunk that on or after the death of the mother, it belonged entirely to him? Wouldn't contingent beneficiaries only come into play if the original beneficiary predeceases the account owner? Aren't the contingent beneficiaries out of the picture because in fact the beneficiary did survive the mother so the funds had, all this tiime, unquestionably belonged to him? Whether the registration was changed would seem to be almost irrelevant. She died, he was the beneficiary, ergo the funds belonged to him. Now he has died. What is to be done?

Did the 401(k)/ESOP have provisions governing the situation? Despite the lack of any formal claims having been made, it seems that the assets are still being held in the 401(k)/ESOP and they belonged to the father. What does the plan say to do now? Would the funds now be considered part of the father's estate?

[jpod]

I don't understand why this is a difficult issue: The money belonged to the Father, so now it belong's to his estate, both for mrd purposes and for legal purposes generally. Did I miss something in the statement of facts by snmhanson?

[masteff]

If the company was big enough to have an ESOP then I hope they're big enough to have an ERISA attorney who can help the company/plan figure it out.

snmhanson, it's not for you to decide no matter how well intended. The money is in a qualified plan and numerous laws, regulations and court cases exist on the subject of inheritance of qualified plan accounts. You can understand that when inheritances are involved, people can get a bit litigious. Did the father remarry or have other children besides the 2 daughters?

It hurts nothing for the daughters to request in writing (if the plan has provided distribution forms, use those) to each receive 1/2 of the account in question by rollover to an inherited IRA. The plan will then have to review their claims for benefits and respond either by making the distribution or by denying the claims. If the plan denies the claims, then request information on their ERISA appeals process and follow that process. If nothing else, the plan can file an interpleader and get a court to figure it out but the plan isn't likely to do such until a claim for benefits has been made.

The money belonged to the Father, so now it belong's to his estate

I would modify jpod's statement to be "so now it belongs to his plan specified default beneficiary, likely his estate". It's possible although probably rare these days for the plan to contain it's own succession hierarchy; I recall one that was spouse, children, parents, estate. And it's unstated if the father remarried.

[jpod]

My reading of the facts is that the money is already in the Mother's IRA, having been distributed from the 401k/ESOP long ago, and the Father was the beneficiary of that IRA, but he never did anything that would create a death beneficiary vis a vis his death.

[My 2 cents]

My reading of the facts is that the money is already in the Mother's IRA, having been distributed from the 401k/ESOP long ago, and the Father was the beneficiary of that IRA, but he never did anything that would create a death beneficiary vis a vis his death.

So now attention must shift to the rules governing IRAs. My guess (not personally involved in such things) is that it is almost certain that that IRA would be considered as being in the father's estate, especially since he took no steps to change ownership (and thus would not have been able to set up a beneficiary of his own). It would be my expectation as before that the contingent beneficiaries named by the mother are no longer relevant, since the account ownership would have automatically gone to the father (as primary beneficiary) upon the mother's death.