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Beneficiary is estate -- inherited IRA?


LauraS

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We had an associate pass away with no designated beneficiary on file for the 401k. Per the order of succession in the plan document, the beneficiary is the associate's estate. The beneficiary of the estate is now wanting to transfer the money into an inherited IRA. Can the transfer to an inherited IRA occur because the beneficiary is an estate? If so, would it have to be setup in the name of the estate or can it be setup in the name of the beneficiary of the estate? 

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2 hours ago, LauraS said:

An estate, not being a natural person, cannot have an IRA.  I am fairly certain that there is no IRS authority that would permit what the so-called "beneficiary of the estate" is proposing, and by the way if there are creditors of the decedent they would be entitled to any money before any of the decedent's heirs. 

 

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I believe that there are PLRs that would support the notion that if the estate has only one beneficiary for the IRA (which you might be able to get to through qualified disclaimers by the others), you could do the inherited IRA. Complicated and not worth researching if a small amount, but if large enough worth checking out.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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21 hours ago, Luke Bailey said:

I believe that there are PLRs that would support the notion that if the estate has only one beneficiary for the IRA (which you might be able to get to through qualified disclaimers by the others), you could do the inherited IRA. Complicated and not worth researching if a small amount, but if large enough worth checking out.

Correct.  We have had a variation of this issue come up where a substantial amount could only be paid to the estate rather than the widow of the participant.  I posed the question at a local ERISA round table luncheon, and one of the attorneys in our group knew of a PLR that was close enough.  In that case, the IRS ruled that something to the effect of a benefit payable to an estate in which the spouse is the only beneficiary is treated as if going directly to the spouse, and is therefore eligible for rollover.

I don't have access to the PLR at this moment but I can post it or a link tomorrow if anyone would like to read it or add it to their "research file".

 

 

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Somewhat related is this discussion about the relationship between rollover and estate.

https://benefitslink.com/boards/index.php?/topic/64252-qdro-deceased-alternate-payee/

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Attached PLR is from January 2019 which I think is pretty close to what we are talking about here. 

Beneficiary of Decedent's IRA was a trust.  The trust, children, and grandchildren of Decedent disclaimed any interest in the IRA.  IRS agreed that Decedent's spouse is treated as having acquired the IRA directly from Decedent and is eligible to do a 60 day rollover.

201901005.pdf

 

 

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We are told that by default the beneficiary is the estate and that there is only a single heir to take the residuary estate.  I don't believe that the IRS has ever issued a private ruling or other form guidance that would permit a "look-through" of the estate so that the individual can be deemed to be the designated beneficiary and roll to an inherited IRA, but I could be wrong.

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9 minutes ago, jpod said:

We are told that by default the beneficiary is the estate and that there is only a single heir to take the residuary estate.  I don't believe that the IRS has ever issued a private ruling or other form guidance that would permit a "look-through" of the estate so that the individual can be deemed to be the designated beneficiary and roll to an inherited IRA, but I could be wrong.

PLR 201901005 (attached above) has the spouse as designated beneficiary after all other beneficiaries of the estate disclaimed.  OPs situation appears to be a non-spouse beneficiary (since it is going to the estate by document default), but I'm not sure that it would change the outcome.

 

 

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The ruling involved an IRA with the surviving spouse ultimately being deemed to be the beneficiary via the estate after the designated trust beneficiary and all other affected parties disclaimed.  Not clear whether the analysis in that ruling would apply to a 401(a) plan, but perhaps it could.

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Only a 'designated beneficiary' can roll over assets from a qualified plan. An estate is not a designated --beneficiary. Therefore, a estate is not permitted to rollover amounts from a qualified plan.  Notice 2007-7.

https://www.irs.gov/pub/irs-drop/n-07-07.pdf, starting on page 5.

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 think the theoretical issue here is whether you can look through the estate to its sole beneficiary (if that is the case ab initio or consequent of qualified disclaimers) as the designated beneficiary. In the referenced PLR201901005 various disclaimers resulted in an IRA left to the decedent's trust to instead flow to his estate, of which is spouse was sole beneficiary (also consequent of said disclaimers). That being the fact pattern, the ruling stated that "Taxpayer, as Decedent’s spouse, will be treated as having acquired IRA 1 directly from Decedent, and not from Decedent’s estate or Trust." Assuming a similar fact pattern can be established, the practical issue will be finding an IRA trustee or custodian who will accommodate, absent your own PLR.

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29 minutes ago, FPGuy said:

I think the theoretical issue here is whether you can look through the estate to its sole beneficiary (if that is the case ab initio or consequent of qualified disclaimers) as the designated beneficiary. In the referenced PLR201901005 various disclaimers resulted in an IRA left to the decedent's trust to instead flow to his estate, of which is spouse was sole beneficiary (also consequent of said disclaimers). That being the fact pattern, the ruling stated that "Taxpayer, as Decedent’s spouse, will be treated as having acquired IRA 1 directly from Decedent, and not from Decedent’s estate or Trust." Assuming a similar fact pattern can be established, the practical issue will be finding an IRA trustee or custodian who will accommodate, absent your own PLR.

Than you for the PLR @FPGuyThe challenge here is that the participant was not survived by a spouse (  I am assuming that is the case,  because the document would have defaulted to a spouse, if there was one-- I think there might be an exception for marriages of 1 year and under- I would need to double check). The IRS have been consistent in permitting surviving spouses to be treated  as the beneficiaries of IRAs- when the estate or a trust is the beneficiary and the spouse is the beneficiary of  the estate/trust with sole control over disposition of the assets- allowing such spouses to rollover the inherited IRAs to their own IRAs. That treatment is not permitted for non-spouse beneficiaries . As such, even if a PLR was issued to allow a nonspouse to be treated as the beneficiary of the 401(k) account , that person would still not be a 'designated beneficiary' and would therefore not be permitted to rollover the inherited 401(k).

The 401(k) Plan will ( should ) not permit a rollover for a nondesignated beneficiary. An IRA custodian, not knowing the source of the funds, might accept the direct rollover if it was done (albeit mistakenly)- but, that would result in an excess contribution to the inherited IRA

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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Thank you for everyone's responses - I really appreciate it! Due to the ongoing pressure from the estate attorney and estate beneficiary's financial advisor to pursue the rollover without regard to the plan document, we have sought the advice of an ERISA attorney to ensure that everything is handled correctly.

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54 minutes ago, LauraS said:

Thank you for everyone's responses - I really appreciate it! Due to the ongoing pressure from the estate attorney and estate beneficiary's financial advisor to pursue the rollover without regard to the plan document, we have sought the advice of an ERISA attorney to ensure that everything is handled correctly.

You are welcome.

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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Issue has become moot in the instant case, but I respectfully disagree that it pivots on the unique privilege that a spouse has in rolling over an inherited IRA into his/her name. Isn't the question whether the non-spouse in this case can establish an inherited IRA for stretch purposes? I am suggesting that the logic of the cited PLR which ignored the intermediating estate in favor of the individual beneficiary thereof could be extended to a situation such as that presented.

 

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On 7/10/2019 at 3:54 PM, FPGuy said:

Issue has become moot in the instant case, but I respectfully disagree that it pivots on the unique privilege that a spouse has in rolling over an inherited IRA into his/her name. Isn't the question whether the non-spouse in this case can establish an inherited IRA for stretch purposes? I am suggesting that the logic of the cited PLR which ignored the intermediating estate in favor of the individual beneficiary thereof could be extended to a situation such as that presented.

 

I wish you were right FPGuy.

The crux of the issue is the definition of a 'designated beneficiary'

My reference to the spouse relates only to the IRS consistently permitting the spouse to rollover the amounts, when the estate is the beneficiary, as was the case in the PLR you referenced. The regulatory issue is whether a nondesignted beneficiary can rollover assets from an inherited 401(k) to an inherited IRA. The answer is no.  Only a designated beneficiary is permitted to perform such a rollover. The question then becomes ' who is a designated beneficiary'?  Only a person or a qualified trust is a designated beneficiary. A nonperson, such as an estate , is a nondesignated beneficiary and is therefore not permitted to rollover amounts inherited under a 401(k)- this applies even if the assets pass through to individuals, because, in order to be a designated beneficiary, one has to be a beneficiary at the time of the participant's death.

If the decedent's account had been an IRA, the it is possible that the assets could be transferred to an inherited IRA for the beneficiary of the estate ( emphasis on transfer)- the IRS have allowed such transfers under PLRs- but, even then, they made sure to state that the beneficiary of the estate is not a 'designated beneficiary', and the IRA is therefore still treated as if it did not have a designated beneficiary for distribution purposes.

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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