Estate required for trailing distribution?

[benefitz]

We have a terminated participant who recently received a lump sum distribution of his entire account balance who now has a trailing distribution of earnings. We just found out the participant passed away unexpectedly. The financial institution is requiring the name of the participant's estate and the tax ID number for the estate before it will process the trailing distribution. The participant's relatives say they will not be opening a formal estate because it is not required in the participant's state.

Can't the financial institution issue the trailing distribution to the participant just like the original distribution?

Can the financial institution really require the opening of an estate just for purposes of making the trailing distribution? 

[ESOP Guy]

Who is the actual beneficiary per a beneficiary form or plan document?

Isn't that who the check is made payable to?

If the beneficiary is an estate then the estate needs to get an EIN which is a pain.  But the estate will have to pay the taxes.  (I believe this make a rollover to an IRA not an option for the person(s) who are beneficiary (ies) of the estate.)  That is just a good reason to make sure people are completing beneficiary forms.  I think it helps if the plan document also says who is the beneficiary if there is no form more then spouse and then estate.  I like documents that say:  spouse, children (pro rata), then maybe parents/siblings and if none of those exist then an estate.  . 

[benefitz]

No, the distribution is payable to the participant because it is a trailing distribution that is already subject to the distribution election the participant made before he died. The payment is not made to the participant's beneficiary. Not sure why the financial institution is requiring the opening of an estate when it is not required in the participant's state of residence and the trailing distribution relates to a distribution the participant elected before death and is payable to the participant, not the beneficiary. 

[My 2 cents]

1.  If it's payable to the participant and the participant is dead, how can the check even be cashed except by the representative of the estate?

2.  Doesn't the participant's death affect the previously scheduled payout arrangement?

3.  People who make distribution elections of that sort would usually be the kind of people who have estates, wouldn't they?  One presumes that the deceased was not a rank and file participant.

[benefitz]

My question is whether a financial institution can require the opening of an estate when it is not required in the state. The details of the scenario are just background. 

In reply to My 2 cents:

1. The check won't be cashed. It will be deposited to the participant's bank account just like the check for the original lump sum distribution. The participant's bank can accept for deposit into the participant's bank account checks made out to the deceased participant.

2. Not in this situation. The participant elected a lump sum distribution and the distribution election forms specifically cover the trailing distribution. 

3. No. The distribution election is not something that would only apply to "the kind of people" who would have an estate. (not sure what is meant by that?) This plan makes trailing distributions all the time because of the distribution timing and the contribution timing.  That's why the election forms cover it. 

[david rigby]

Financial institution requiring .....? 

Who makes the rules?  What does the plan say?

 

[ESOP Guy]

I guess we just disagree about the facts. 

If the person is dead they can't receive the funds period because there is no person.  Depositing the funds doesn't solve the question about how will the check be cashed.  Depositing money is a form of cashing the check.  It is cashing the check and then depositing the cash into an account.  It requires someone to endorse the check and the person who needs to do that is dead.  So who is endorsing the check? 

I don't see what the form says matters.  The person who completed the form is dead.  To me that means the form no longer is valid.  What matters is the plan document.  Any plan document I have seen says this is a distributions from the plan.  All plan documents say upon death a distribution is made to the beneficiary not the participant.  So I stand by my answer the check ought to be made payable to the beneficiary. To make a distribution to someone who isn't alive is violating the terms of the plan that is an operational error.

In my mind you simply are defining the problem incorrectly by insisting the problem is the estate does or doesn't need an EIN. 

I repeat myself again it is true if an estate is being paid a distribution it has to have an EIN. 

[K2retire]

The check is endorsed by writing "for deposit only" on it. Once in the account of the payee, how the funds come out of the account is another matter. If there was a joint owner of the account -- problem solved.

 

[ESOP Guy]

K2retire it has been since the '80s since I took my B law classes but my memory says merely writing "for deposit only" isn't an endorsement.  Not saying there aren't banks that don't take checks like that.  But the most common way you see it is a business which stamps for deposit only and the business name but note it does have the business name.

A check is payable to a specific person and payable only to that person.  An endorsement is that person giving someone else the right to collect on that check.  You can put restrictions on that endorsement but the person has to sign over those rights.  In this case I stand by the idea a dead person can't sign over the right to have that check paid to someone else simply because the person is dead. 

[jpod]

The characterization of the remaining amounts as "trailers" is irrelevant.  The money belongs to the beneficiary, either by designation or default per the plan document.  Period; end of story.  If the beneficiary is the estate, well that's unfortunate.  

[K2retire]

19 hours ago, ESOP Guy said:

K2retire it has been since the '80s since I took my B law classes but my memory says merely writing "for deposit only" isn't an endorsement.  Not saying there aren't banks that don't take checks like that.  But the most common way you see it is a business which stamps for deposit only and the business name but note it does have the business name.

A check is payable to a specific person and payable only to that person.  An endorsement is that person giving someone else the right to collect on that check.  You can put restrictions on that endorsement but the person has to sign over those rights.  In this case I stand by the idea a dead person can't sign over the right to have that check paid to someone else simply because the person is dead. 

I was just offering a practical solution that works in many cases, not an opinion on whether it is legally correct.