Distributing money out of Inherited Estate DC / 403(b)

yugo

I've recently inherited some DC & 403(b) funds which - by the grace of Fido - ended up in an Estate account.

I've talked to several CPAs / CFFs and still could not get a clear picture re how many years I have to distribute the funds out of these accounts. For a regular inherited retirement account the answer is pretty straightforward, but for an estate IRS website alone seems to give no less than 3 different answers.

Does anyone here have a clue or a good reference?

bee

I like to ask questions like these on the discussion board at Ed Slott's IRA help site:

https://irahelp.com/forums/ira-discussion-forum/

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I searched the words "Inheriting IRA estate" and came up with these topics:

https://irahelp.com/search/Inheriting+IRA+trust+estate

msf

Could you clarify the situation? It sounds like the defined contribution plans did not indicate a beneficiary, so by default the estate inherited the assets. Further it sounds like the assets are still in the DC plans, just owned by the estate of the deceased.

If that's what has happened, you seem to be asking how long does the estate have to move the assets out of the DC plans?

For a regular inherited retirement account the answer is pretty straightforward,

Perhaps. Worth looking at, for background. If an IRA owner dies with no beneficiary named, the IRA is retitled as an estate IRA. One has 5 years, not 10, to move the money out of the IRA assuming that death occurred before RMDs were required to begin.

Here's a page from Fidelity that illustrates the complexity even with IRAs:
https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

Sections of interest:

>Estate beneficiary: If the original depositor of an IRA names their estate as the beneficiary of their account, or did not leave beneficiaries on their IRA, the IRA funds may go to their estate.

-and-

Death on or after 1/1/20, [and asset recipient is an] estate entity, non-see-through trust beneficiary of the original depositor's IRA. [elsewhere this is called a nonperson beneficiary]:

[Death before RMDs begin] Move inherited assets into an inherited IRA in the name of the estate or non-see through trust and withdraw the balance by December 31st of the year containing the 5th anniversary of the original depositor's death

[Death after RMDs begin] Move inherited assets into an Inherited IRA in the name of the estate or non-see through trust and begin taking RMDs the year following the year of the original depositor death using their age in the year they passed away.

Tax treatment of estate-owned DC plans should be no different.

Inheriting a 403(b) Plan: What to Do & How It Works
https://www.missionsq.org/products-and-services/403(b)-defined-contribution-plans/403(b)-inheritance-beneficiary.html

A “nonperson beneficiary” is an estate, trust or charitable organization. This type of beneficiary has the following options:

• Account owner dies before the required beginning date.... In that case, the account must be depleted by December 31 of the year that includes the 5th anniversary of the account owner’s death.
  
• Account owner dies on or after required beginning date then the entity may use a life expectancy calculation based on the remaining life expectancy of the decedent.

Ascensus concurs:

The SECURE Act identifies three groups of beneficiaries: eligible designated beneficiaries, noneligible designated beneficiaries, and nonperson beneficiaries.
...
The third group of beneficiaries consists of nonperson beneficiaries (i.e., entities, such as trusts, estates, or charities). Nonperson beneficiaries of account owners who died before their required beginning date (RBD), which is the deadline to begin RMDs, remain subject to the 5-year rule and—with the exception of certain see-through trusts—must distribute the inherited assets within five years.

https://thelink.ascensus.com/articles/2024/2/14/understanding-the-10-year-rule

That's all from the tax perspective. From the estate administration perspective (state law), I'm not convinced that even in the "simple" case of an estate IRA one is allowed to delay five years. My understanding is that the executor (or administrator) is allowed however much time is necessary to distribute estate assets, but not more. For example:

N.J.S.A. 3B:10-23 holds that an executor “is under a duty to settle and distribute the estate of the decedent in accordance with the terms of [the will] and applicable law, and as expeditiously and efficiently as is consistent with the best interests of the estate.…”

https://www.natlawreview.com/article/executor-won-t-distribute-estate-what-can-i-do

Usual disclaimer: I am not a lawyer, this is not legal advice. It is just general information that may not apply to your situation.

yugo

@bee thanks - will definitely try it out!

yugo

@msf thank you the detailed feedback.

The situation is/was somewhat complicated so I thought to distill it a bit.

In summary: Person A had employer-sponsored retirement accounts with Person B as a beneficiary and me as a sole contingent beneficiary. After A died, B should have inherited the accounts as an individual beneficiary. But B died very shortly thereafter w/o the time for the inheritance process to even begin.

I was B's sole beneficiary and am the executor of the estate. It might have seemed reasonable for me to simply inherit A's accounts then, but Fido decided to pass them into B's estate since they were not formally in B's possession at the time of death (i.e., they deemed my beneficiary statuses with both A and B invalid wrt these accounts).

So, now I am trying to figure out how much time I have to distribute these funds from the estate to myself and getting different answers depending where I look / whom I ask.

msf

Keep in mind I'm not a lawyer, so take this for what it is worth, i.e. you're on your own.

"Fidelity decided to pass them into B's estate".

That sounds like Fidelity followed the beneficiary designation of A's defined contribution plan. So long as B did not predecease A (but see below*) the transfer was likely automatic, regardless of the absence of paperwork. That is, the automatic nature of the transfer meant that the account formally (technically) became B's upon A's death even though it wasn't actually transferred at that time.

B's "virtual" account had no beneficiary designated since there was no paperwork done before B died. So B's "virtual" account became the account of B's estate. That brings us back to the situation where there's an estate defined contribution plan that must be distributed within five years.

Edit: The five years is assuming that the RMD period (for B) had not yet begun. Otherwise, it seems that the withdrawal schedule would be based on B's life expectancy. If inherited DC plans follow the same rule as inherited IRAs (haven't checked yet), each year's RMD would be calculated by subtracting one year from the previous year's life expectancy, not by referring to tables every year. That is, if B's life expectancy were 15 years now, then next year one would divide assets by 14, the next by 13, and so on. This could be another source of confusion and why you are seeing various rules.

Again, just speculating here.

* did B predecease A from a legal perspective?

If B's death is close enough after A's death, then state law may create a "legal fiction" that B died before A for purposes of inheritance. This situation is called "simultaneous death".

Many states have default laws ... including the Uniform Simultaneous Death Act ... Generally speaking, these laws establish a rule that when two individuals die within 120 hours of each other, each individual will be treated as having predeceased the other. Thus, if a husband and wife die at the same time or within 120 hours of each other, and the husband’s will distributes 100 percent of his property to his wife at his death, the wife is treated as having predeceased her husband,

https://wilsonlawgroup.com/simultaneous-deaths/

This varies from state to state, and the text above describes how it applies to wills. It seems logical that something similar would apply to beneficiary designations. But I haven't seen that in writing.

If a state simultaneous death law applies to beneficiaries, and if the two deaths were close enough together to trigger that law, then Fidelity could (should?) have treated the situation as if B died first. That is, it could (should?) have designated you as the beneficiary of A's account.

That Fidelity didn't do this suggests that either "simultaneous death" doesn't apply to beneficiary designations, or the two deaths weren't close enough in time to trigger that law.

Somewhat moot, though, since the fact of the matter is that the account currently belongs to B's estate.