Participant dies before distribution check is deposited

[AlbanyConsultant]

Participant requests a lump sum cash distribution payable to herself.  It gets overnighted to her and received, but she dies before depositing it or cashing it or whatever transaction she was going to do.

The participant's son wants to deposit it into the participant's checking account to make it part of the estate.  The plan beneficiary (who is the late participant's mother) wants to have the whole transaction stopped and re-processed, arguing that since the check wasn't cashed yet, those are still plan assets and therefore the payment should now go to her as beneficiary.  So I guess this really comes down to when are the assets considered paid out from the plan - when the check is cut from the recordkeeper (which is what it shows when you log into the RK's website), or when the check is cashed?

Any guidance (other than "tell them all to hire a boatload of attorneys" - which is where this might end up, anyway) is appreciated...

[CuseFan]

38 minutes ago, AlbanyConsultant said:

those are still plan assets and therefore the payment should now go to her as beneficiary.  So I guess this really comes down to when are the assets considered paid out from the plan

The IRS position is that the distribution has been paid and is a taxable event to the participant whose failure to negotiate does affect. That would lead me to believe it should now be part of the estate. DOL might opine otherwise, considering uncashed check still a plan asset, which obviously takes you in the other direction. IRS recently issued a Rev Ruling, not sure about DOL guidance but remember reading about their opinion concerning stale checks, but that's not quite your situation.

I was my father-in-law's executor 25 years ago when he passed with an uncashed social security check or two and for the life of me I can't remember if I was able to deposit into his account (estate) or had to have reissued in three pieces to his surviving children. 

I think you have a taxable distribution to the now deceased participant and the funds are part of the estate.

[RatherBeGolfing]

3 hours ago, CuseFan said:

IRS recently issued a Rev Ruling

Rev Rul 2019-19

[Larry Starr]

5 hours ago, CuseFan said:

The IRS position is that the distribution has been paid and is a taxable event to the participant whose failure to negotiate does affect. That would lead me to believe it should now be part of the estate. DOL might opine otherwise, considering uncashed check still a plan asset, which obviously takes you in the other direction. IRS recently issued a Rev Ruling, not sure about DOL guidance but remember reading about their opinion concerning stale checks, but that's not quite your situation.

I was my father-in-law's executor 25 years ago when he passed with an uncashed social security check or two and for the life of me I can't remember if I was able to deposit into his account (estate) or had to have reissued in three pieces to his surviving children. 

I think you have a taxable distribution to the now deceased participant and the funds are part of the estate.

Agree; 100%.  It is in the estate and the distribution was effected when the check was issued while the participant was alive. It would be different if the check was issued and he had already died.

[AlbanyConsultant]

This is what I was leaning towards.  Thanks, all!

[Luke Bailey]

AlbanyConsultant, if there is much money involved, I would be cautious. Rev. Rul. 2019-19 does not deal with the situation of the payee participant's death. Arguably it should stand for the proposition that for federal income tax purposes the amount will be on you deceased participant's final return. However, it is just a revenue ruling, i.e. the semi-authoritative opinion of the IRS, and the example it uses is a small amount forced cashout, so it was really trying to provide a practical accommodation to plan administrators more than being a deep statement or analysis of the rules of constructive receipt. Bottom line, if there is a significant amount involved, I think there is plenty of room for the son and mom to fight in court.