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IRA & 401K Proceeds Payable to One's Estate


Christian

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A client came by yesterday and in our discussion mentioned his 401K plan and IRA proceeds after his passing will be paid into his estate. I have never seen this as most have a named beneficiary who gets the account. I suspect it is not a great idea as it would seem to expose the full account proceeds to tax on a Form 1041 unlesss there are special provisions for these accounts. I myself have a similiar provision and plan to address it shortly myself. Information on this is appreciated.

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The client I spoke with who has this arrangement has now gone to a local hospital in not good condition. I decided to ask this question to the PPS as I may now have to confront this problem. The individual with whom I spoke said she did not know in fact stating " I don't know what you are talking about" and further advised she would transfer me to another area. Shortly thereafter the phone connection ended. So much for IRS assistance. ☹️

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Many thanks. This clears this up. It's clear an individual is better served by indicating a beneficiary with the fiduciary organization which is a much simpler process. A cousin's wife died some time back and unknown to him had gone to an attorney and directed by her will that her IRA be placed in a trust for one of her grand children. The fiduciary had no beneficiary so listed and simply transferred the account into the cousin's existing account since he was of course her husband which made quite a mess of her wishes. ☹️ My client is recovering and hopefully will have adequate time to addrss this himself. Making his estate the beneficiary is an extra step he can avoid as well as yours truly.

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You have to be careful with naming beneficiaries.  ERISA dictates that the spouse is the beneficiary of retirement plans unless s/he signs a waiver.  I've pondered this recently regarding a divorced man who named his children as the Bs.  He got remarried and later died.  I wonder if his new wife has a claim because she never signed a waiver.  She may not even know he had it so won't put up a fight.  I just wonder if she legally could.

It's generally not a good idea to let the proceeds go to the estate because it has to take the whole amount at once so the tax burden can be considerable.

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That was my understanding of how things went Sara but after reading Judy's post and referencing the provided website I changed my understanding of the issue. In point of fact my financial guy was of the same opinion that the entire balance was cashed out and fell into the estate as a taxable distribution. In my client's case the fiduciary will simply have to divide the account balance into three accounts with the heirs having to take distributions as indicated by the fiduciary. This looks to me to be a much simpler process than going the extra cumbersome step of moving the assets through his estate. In my cousin's case referred to above the fiduciary simply ignored his wife's expressed wishes as stated in her will and placed the entire account balance into his account. He had provided no waiver and the attorney she used evidently was not up on the law.

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@Christian, you have two different types of retirement assets in your first post, and you later brought a second storyline into the mix as well.

My post was about IRAs only in response to your original question about your client, and made prior to bringing in your cousin's situation where a wife, a trust, and grandchildren were mentioned.

Sara's post is about ERISA that covers most retirement plans of companies and that would include your client's 401k.  IRAs aren't covered by ERISA, but SIMPLE IRAs are because those are employer plans.

 

Edited by jklcpa
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9 minutes ago, Lion EA said:

Ah, so one can change one's beneficiary on one's IRA withOUT a signed waiver from one's spouse, yes? But, not on a SEP or SIMPLE or 401(k) or 403(b) or 457.

In general, a spousal waiver wouldn't be needed for an IRA. However, in community property states the spouse would have a claim to any retirement savings made after marriage, but not contributions prior to that.  I'm not in a community property state, but if you are advising a client that is, you'll have to take that state's laws into consideration.

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The cousin's wife had a regular IRA and neither she nor the attorney she used evidently had an understanding of the beneficiary designation. She went to an attorney and did not advise her husband who after her death was presented with this surprise. The fiduciary as stated simply placed the assets into his account. They lived in Florida. These IRA assets were a settlement from her first husband. She had signed a divorce settlement stipulating that if he outlived her the remaining IRA assets in her account would revert to him. It was quite an interesting mess to say the least. As far as my client is now concerned he is going to sit down with the respective fiduciaries and do what's best and I'll get on the phone and get my own in order as well. Thanks again.

 

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