Profit sharing plan. Beneficiary does not want to take pension contriibution.

[caryn22359]

Question ,

Plan participant died in January 2016

1. The primary beneficiary was his wife. She died before him and participant named his son as secondary beneficiary.

2. Son asked if he could disclaim his inheritance and the money be payable to the Estate to Father. ( he was the only other beneficiary)

2. Does profit sharing plans allow the beneficiary to disclaim?

3. If the beneficiary decides to disclaim, who will the lump sum be made payable to?

4. Is there mandatory withholding on the lump sum payment?

Thank you for help in this.

[jpod]

Why isn't surviving spouse's estate the beneficiary (stepping into the shoes of the surviving spouse)? Does plan document or beneficiary say that surviving spouse's entitlement ends at her death and secondary beneficiary becomes the beneficiary?

[My 2 cents]

Why isn't surviving spouse's estate the beneficiary (stepping into the shoes of the surviving spouse)? Does plan document or beneficiary say that surviving spouse's entitlement ends at her death and secondary beneficiary becomes the beneficiary?

I am not a lawyer and don't work on defined contribution plans, but if the spouse predeceased the participant (as noted in the original post), then nothing would ever be payable to the spouse's estate. To be entitled to any plan benefits, the spouse must survive the participant.

I don't work on tax matters, either. Is there some kind of tax advantage to having the plan benefits paid to the estate and inherited by the son from the estate as opposed to the son being paid the plan benefits directly? If so, would avoiding having to deal with the tax consequences of the son receiving the plan benefits directly be considered legitimate or a tax avoidance scheme? One presumes that the plan itself does not give the beneficiary a choice of that sort, and just says "figure out who the beneficiary is and pay the benefits to the beneficiary".

[jpod]

Sorry, I did not read the OP carefully. I was thinking that spouse survived the participant.

[K2retire]

The beneficiary of the estate could be someone entirely different than the contingent beneficiary under the plan. If there are significant debts in the estate, the fund could en up going there, rather than to any beneficiary. (Although that seems to be a great reason for the son to want to take the funds directly.)

The son may be under the mistaken impression that he would owe a 10% penalty on the distribution, but the estate would not.

Or he might believe that he has legal liability for his father's debts. In that case, he might think it preferable to have the estate pay the income tax and pay the debts directly.

Or maybe he already has more money than he knows what to do with -- in which case I'd like to volunteer to help him out!

[caryn22359]

Unfortunately, I do not know his reasons for doing this. If the money goes into the estate and it is divided according to the will, 1) Does the estate pay the federal income taxes on the distributions to to the beneficiaries or is the income tax paid by the beneficiaries.

thank you

[My 2 cents]

If the estate is below $X million, is there any tax on the estate at all? Is it not true that no taxes are owed by the heirs on inheritances from the estate?

If the money is paid directly to the beneficiary from the plan, when would the estate owe taxes? When would the beneficiary owe taxes?

If the estate were worth $700,000 prior to the plan distribution, what would be the difference in tax consequences between a $200,000 plan distribution to the estate (with all of the estate after taxes going to the son) and the son receiving $700,000 from the estate (less applicable taxes) plus a $200,000 plan distribution?

Just trying to get a better handle on the reason for the son trying to "disclaim" his rights as plan beneficiary.

[MoJo]

First, various states have statues or other law that allow a "beneficiary/heir" to disclaim property, and the rules to do so vary. Under federal law, there are also rules that govern the tax consequences of doing so (as doing so might entail a taxable "gift" to others).

Second, federal estate tax law pulls in certain retirement benefits into the estate for tax purposes. Doesn't matter if it's distributed to another or flows through the estate. Same may be true for certain types of life insurance, etc.

Third, keep in mind there is a difference between an estate tax and an income tax. The estate may pay taxes on assets "owned" at time of death (including retirement plan assets), and then there may be an income tax consequence on the distribution of retirement plan assets as well. I believe (based on limited experience in the field) that the estate is a "pass through" entity for the income tax consequences of the distribution, should the distribution go to the estate.

Finally, as pointed out above, there are lots of reasons to disclaim. Personal tax situation. Compassion for other heirs (siblings, half siblings, nieces and nephews). There may be some agreement for him to do so as well. Perfectly legitimate, and I am aware of no case law that says ERISA preempts and a beneficiary can't disclaim - if he or she does so according to the applicable laws/rules.

P.S. it's "attorney time!" Always best to get an attorney involved in a situation like this.

[lisam]

Does profit sharing plans allow the beneficiary to disclaim?

Yes, Treasury Regulation 1.401(a)(9)-4 is the code section that indicates the timing for determining a designated beneficiary and it allows any disclaimers that satisfies Code § 2518.

If the beneficiary decides to disclaim, who will the lump sum be made payable to?

I think you need to look at the plan document and determine who the default beneficiary is when there is no named beneficiary. By disclaiming the plan assets, the son is essentially being treated as if they were never named the beneficiary in the first place. The default beneficiary may well be the estate, in which case you would take the executor's direction to get the estate information.

Is there mandatory withholding on the lump sum payment?

My understanding is this is treated like any other death distribution. They have a 10% early distribution penalty tax exception but withholding would apply.

Does the estate pay the federal income taxes on the distributions to to the beneficiaries or is the income tax paid by the beneficiaries.

The 1099-R will be issued directly to the estate. I have no idea how estate taxes work however I think generally administrator responsibility is only to know who to issue the report to not offer tax advice. As MoJo so aptly puts it, for that it's attorney time.

[caryn22359]

Thank you so much for the help.

[david rigby]

Highly recommended that the original poster should not care about:

- the debts of estate, or

- the reason the son may want to disclaim, or

- what the estate tax structure is, or

- etc.

These are of no concern to the plan sponsor, to the TPA, etc.

Rather, advice to the son (who just might be the only person to whom the plan sponsor can direct any comments) should be to relate the provisions of the plan: the plan states the benefit goes to X, etc.

Let the son and/or the estate gets its own legal advice.

[MoJo]

While I agree with David, generally, 1) the PLAN still needs counsel to determine the effect and effectiveness of the disclaimer should it arrive; and 2) these forums provide an opportunity for learning, so context (estate tax, income tax and the like can be helpful in understanding).

[K2retire]

The 1099-R will be issued directly to the estate. I have no idea how estate taxes work however I think generally administrator responsibility is only to know who to issue the report to not offer tax advice. As MoJo so aptly puts it, for that it's attorney time.

David is right, but in the interest of general learning here's a bit more info. For tax purposes the estate is considered to be a separate entity (much like a plan is separate from the employer). If the income payable to the estate is distributed to one or more beneficiaries, it is taxed to the receiving beneficiary. However, if the income remains in the estate, it is taxed to the estate. Back in the 80's the income tax rates for trusts and estates that did not distribute all income were particularly high (presumably to encourage distribution of the income). However there have been enough tax law changes since then that I have no idea if that is still the case.

[Bird]

Way back at the beginning it was stated that "he was the only other beneficiary" (presumable of the estate). I would definitely ask what he is trying to accomplish by having it paid to the estate as opposed to him directly. Odds are he's just confused and paying it to him directly saves everyone some hassles. I don't see it as improperly offering legal advice. If he comes back and says "I know what I'm doing" then fine, do it that way.