Check Issued But Not Cashed Prior to Ptcpt. Deceasing

In a profit sharing Plan, a check was issued for the participant's balance to the participant pursuant to his distribution request. At some point (<180 days) after the check was issued, the participant passed away prior to cashing the check. The participant's designated beneficiary in the Plan was their surviving spouse. The spouse and their family is requesting that the check be reissued payable to her. To this point, we've advised the client that at some point when the distribution request was submitted/the check was issued, the funds became the participant's individual assets instead of assets of the Plan's trust, and so any reissues should only be made payable to the name of the participant or their estate to avoid liability for an incorrect distribution of funds. So any question of who the participant's beneficiary in the Plan was/is is irrelevant because the assets are no longer assets for the Participant's account in the Plan. Of course the Plan document seems to be silent on these very fine details.

The participant's family has spoken with a lawyer (presumably an estate lawyer), and he said that any assets would have to go through probate unless a check is reissued. My thought is whoever is the default executor of the individuals' estate (no will is known of, and this is the only significant asset) should be able to deposit the check in the participant's name into the deceased participant's bank account, and then the funds could be accessed by the spouse (presuming she has access).

Thoughts on my/the participant's family/the lawyer's reasoning?

The plan’s administrator might want its lawyer’s advice about whether the plan might be willing to make a direct payment to the participant’s surviving spouse if the duly appointed and properly serving personal representative of the decedent’s estate signs and delivers a written release that the plan’s payment to the surviving spouse is a satisfaction of the plan’s and all plan fiduciaries’ obligations with promises to defend, exonerate, and indemnify all plan fiduciaries and service providers against any other claim.

(No matter how strong the release, satisfaction, and indemnities, that way still takes on risks. For example, bypassing the decedent’s estate risks at least some risk regarding the decedent’s creditors. But the plan’s administrator, with its lawyer’s advice, might decide the risks are worthwhile in the circumstances.)

The plan’s administrator might want its lawyer’s advice about whether it makes legal and practical sense (or doesn’t) to pay nothing until there is a proper claim submitted by the proper distributee.

(That way, too, bears risks.)

To evaluate the strengths and weaknesses of imaginable risks and opportunities, the plan’s administrator might prefer its lawyer’s careful and thorough reading of the documents governing the plan. Among several points, the administrator might want its lawyer’s advice about whether a court would defer to the administrator’s incorrect but plausible interpretation about what the plan provides.

If a lawyering expense would be paid from or reimbursed by the plan’s assets (whether allocated among all individuals’ accounts or only to the participant/distributee’s account), the administrator might have a responsibility to incur no more than a prudent expense.

Yet, a plan’s administrator might design claims procedures and responses to challenging claims that can be applied efficiently and with reasoned logical consistency and uniformity. Consider a fiduciary’s duty of impartiality.

This is not advice to anyone.

You may have thought of this already but there are a lot of important side issues.   I have had this happen before. 

if the first check was paid in 2025 and you reissue can you stop the 2025 1099-R?  If not, will there be a 1099-R for the original check and whoever gets the new check?  it seems like there shouldn't be two 1099-Rs.   

I know a lot of banks don't allow even the correct person endorse and deposit a check in a dead person's name so while maybe legal my guess that check can't get deposited.  

However, the person had the check so it is taxable income to the deceased.   If no 1099-R ends up in their name that isn't going to be an issue most likely.   After that it is an asset of the estate in my mind. 

My guess the plan needs some advice of an attorney like mentioned.   

As the plan’s administrator evaluates risks and opportunities, it might consider:

which directions the plan’s directed trustee would accept or refuse;

which instructions the plan trustee’s custodian would accept or refuse;

which instructions the plan trustee’s or custodian’s paying agent would accept or refuse;

which services the plan administrator’s recordkeeper would provide or decline.

This is not advice to anyone.

@OrderOfOps suggested steps are consistent with the IRS position that, for purposes of determining the year a distribution is taxable, a distribution occurs when the check is written and not when a check is cashed (and likely @ESOP Guy also had this in mind).  The IRS took this position what asked about the year of taxation when a participant delayed cashing a check beyond plan year end.  If this concept is applicable here, then the check represents an asset in the deceased participant's estate and would be dealt with consistently as any other assets in the estate.  Mechanically, the check would be treated similar to checks that age out if not cashed timely.

Let me alter the facts just a little.  Let's say that the Participant's surviving wife had signed a Marital Settlement Agreement (MSA) intended to resolve all issues in connection with their impending divorce.  Let's assume that the MSA provided that the surviving wife waived any claim against the Participant's PSP account. Have you explored that?  It is a scenario that comes up frequently.

Do the Plan Documents provide that the Order of Precedence cannot be superseded by another document.  See, e.g. page 1 of the attached TSP Death Benefits pamphlet  "You cannot rely on your will, prenuptial agreement, separation agreement, property settlement agreement, or court order to specify who will inherit your TSP account because we do not use any of these documents to distribute death benefit payments."

and at page 8:  "A will, prenuptial agreement, separation agreement, property settlement agreement, or court order will not override either a beneficiary designation or the order of precedence."  

Or perhaps the now deceased Participant removed all of the funds in his account to prevent his soon to be ex-wife from having them sequestered by the court or subjected to an attachment or an injunction. Or maybe he planned to secrete them in his brother-in-law's corporate account in Toronto, or in a bank in Tierra del Fuego. 

At what point in time did the Plan issue a 1099-R?  Did the Plan send withholding to the IRS and/or to the State?

I don't think it matters that "ownership" of the PSP was transferred on the books of the Plan by virtue of handing the check to the Participant.  It's a chose in action and if the Participant didn't cash it I don't think he actually owns it.  In most states a check is a chose in action,  a legal concept representing an intangible right to claim or possess personal property that can only be enforced through a lawsuit rather than by physical possession. It's a recognized form of property, contrasting with a chose in possession - that is, something you have in your hands - a car, a TV, cash in your pocket.  So perhaps the check was nothing more that a piece of paper that had a potential value once it was cashed or deposited into an account.   

There was a recent case in Maryland where the a husband executed a deed to land that that he owned in his sole name to his wife.  He put the signed and notarized deed in the drawer of his desk and proceeded to die.  He never handed/delivered the deed to his wife and never recorded it in the local Land Records.  Our appellate court held that although a gift to his wife may have been intended, it was not finalized by delivery of the deed to the wife or recordation in the Land Records. It's not exactly the same in this case.  The check was delivered but not deposited.    

Whatever you decide to do may be the wrong thing, and you will not know it until it is too late,  and you may be sued by somebody and have to pay the money a 2nd time to whoever the judge says was be right person, and you will have to pay your own legal and expert witness fees, and the legal and expert fees of whoever sued you, and you will get fired and wind up living in trailer park. 

Think about an interpleader and leave the decision to a court.  They can't be sued if they are wrong. 

David G. 

TSP Death Benefits - March 2024.pdf