Segregation of account to Beneficiaries upon death timing

If you have a valid beneficiary designation on file, to you segregate those assets to the beneficiary right away?

For example, if Sam passes away and there are two beneficiaries, his son and daughter, do you split the account up for them and wait for then to claim the benefit?  Or do you leave the funds in the deceased participant's account until they come calling?

I don't think it matters. The ultimate answer will depend on how the plan is invested (pooled vs. self-directed) and if self-directed, who is the recordkeeper. I don't think I'd be in a hurry to split it unless and until a bene requested a distribution.

If a plan provides beneficiary-directed investment, a fiduciary might want its recordkeeper or other service provider to divide a deceased participant’s account into the beneficiaries’ segregated-share accounts on the earlier of any beneficiary’s claim for a distribution or any beneficiary’s delivery of an investment direction.

Further, if a plan provides beneficiary-directed investment and a fiduciary wants an ERISA § 404(c) defense that a beneficiary has control over investments for his or her account (or a similar State-law defense regarding a governmental plan or a church plan), a fiduciary might want its service provider to divide a deceased participant’s account into the beneficiaries’ segregated-share accounts as soon as any beneficiary is identified (and the maximum number of segregated shares is known or determined).

A fiduciary might want its service provider to send an identified beneficiary a “welcome” package that includes the summary plan description, the most recent 404a-5 disclosure, notices, other communications, preliminary identity credentials, and instructions about ways to submit investment directions. Among several purposes and reasons, that a beneficiary received such a package might set up that the beneficiary then had control over investments for his or her account.

Some recordkeepers do not “split” a participant’s account until at least one beneficiary is sufficiently identified with (at least) a name, a Taxpayer Identification Number, and an address.

Some recordkeepers do not “split” a participant’s account until there is a name, a TIN, and an address for each of the segregated-share accounts. But some recordkeepers might allow filling-in placeholder information for a not-yet-identified beneficiary with a placeholder, the plan administrator’s EIN, and the plan administrator’s address.

Another important consideration is the RMD separate account rules (which allow you to apply the rules separately to the account of each beneficiary). 

To avoid having to use the life expectancy of the oldest beneficiary for all the beneficiaries, avoid applying the 5-year rule to all the separate accounts if a non-person is one of the beneficiaries, or avoid having to use the 10-year rule if one of the beneficiaries is not an eligible designated beneficiary, it usually makes sense to split the account by no later than the end of the calendar year in which the death occurred if at all possible. 

If the participant died after required beginning date and the participant didn't satisfy his RMD before death, it is best to split the accounts even earlier since the beneficiaries are required to receive the remainder of any RMD the decedent was owed by end of the year anyway, and you are going to need to report the distribution as taxable to each beneficiary separately.