minor inherited a 401K

[TS61]

situation is, deceased grandmother listed minor grandchild as beneficiary or 401k (no custodian named).  Grandmother had started started taking RMDs.  Financial institution won't release/distribute the 401K to the minor beneficiary until the minor turns 18, so no one will have access to the account for several years.

What are the implications for RMD's and associated income tax on those RMD's when there is no access to the account in order to actually transact the RMD's?  At this point, technically the financial institution won't even tell me (the minor's parent) what the 401K account balance is, though I can probably approximate it's value from other available information.

[Bsch4477]

A minor cannot own an asset. The court will appoint a custodian if none was named in the will. 

[Opus 17]

There are likely required distributions, so you need to get this figured out.  I'm going to page the best expert on the topic, @dmertz 

I agree with the others that someone needs to be appointed guardian or custodian for the child -- presumably that could be you if you are the child's parent.  The court could also appoint an independent financial advisor but they will take a fee off the top to administer the account.

I'm going to assume this happened in 2025.  If the grandmother was past the age where she is required to take RMDs, and did not take her RMD for 2025, the beneficiary must withdraw and amount equal or more than the grandmother's RMD and include it in their taxable income for 2025.  Then, the beneficiary must withdraw their own RMD starting in 2026.  If the grandmother was not past the age to take RMDs, the beneficiary does not have to make a withdrawal this year (but can if they want to), but does need to start taking withdrawals in 2026.  The beneficiary generally has 10 years to withdraw all the money and close the account.  (The rules might be different here, which is why I paged an expert.)

Also, the tax issues for withdrawals are complicated for a minor.  Until the child turns 19 (or possibly 24, if they go to college) their withdrawals may be taxed at a higher rate due to the "kiddie tax".  If the account is of significant size, you may want to hire a financial and tax planner to figure out the best strategy to pay the least tax, depending on the child's age, other income, status as a student, and marital status. 

[TS61]

probate court did not.  Of course probate court doesn't deal with assets directed by beneficiaries. 

[fanfare]

You the parent will be shown on the inherited account as custodian for minor child, along with the child.

You will be able to take required RMDs or take any other actions, including investment decisions..

Get clarification from the custodian.

@TS61 

[TS61]

yes, it unfortunately looks like going to court to get a financial guardianship set up is the only path.   it's interesting in that there were several accounts defined this way and they all simply set up a UTMA custodial account and boom, done.  This one however is a 401K w/ NetBenefits and they won't do anything without a "court document stating that I am the financial guardian" of my own kid.  This despite the fact that Texas (we're in Texas) family code 151.001 specifically states that the child's parent is by default the financial custodian of the child.

Root problem of setting up the guardianship is that the account value is small-ish.  Figure it will cost a somewhat significant part of the asset to execute.   Here we're really only talking 2 years until we gain access so it might actually be cheaper to pay the penalty for late payment of the RMDs.

[Bsch4477]

I believe that until the child is 21 the RMD is calculated on the child’s life expectancy. 

[TS61]

unfortunately no, the financial company won't transfer to a minor at all and the beneficiary only lists the minor's name.  so there is no account to access as they won't initiate the transfer to a minor and they won't ADD a custodian without a court order.

[TS61]

the change to 21 only is in effect if the child is a child of the decedent.  In this case, as a grandchild, the extension of time does not apply

[Bsch4477]

@TS61 You are right. Thanks for the correction. 

[fanfare]

IRS will waive penalties on missed RMDs for "reasonable cause".

@TS61 

[Opus 17]

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@TS61 wrote:

Root problem of setting up the guardianship is that the account value is small-ish.  Figure it will cost a somewhat significant part of the asset to execute.   Here we're really only talking 2 years until we gain access so it might actually be cheaper to pay the penalty for late payment of the RMDs.

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Go to your county court, or call the clerk's office and ask them about this.    I have found court clerks to be incredibly helpful.  You may be able to get yourself appointed guardian of your child's estate with a simple form and no attorney needed.  

If the alternative is to not have any guardian appointed and wait for the child to turn 18, I would be very careful.  Think about any RMDs that will be missed (especially the owner's RMD if they did not take it before they died, which is likely much larger than the child's RMD will be later.   While the IRS may waive the RMD penalty for good cause, I don't know if "I didn't want to do the paperwork" would be good cause.    Also, in order to get that waiver, you have to take all the RMDs at once, which might not be in the child's best interest.

i.e., suppose the child is 15, and misses 3 RMDs at age 15, 16, and 17.  When they turn 18, they must take all the missed RMDs plus the RMD for the year they turn 18, before they can ask for the waiver.  That might bump up their income and result in more tax (due to the kiddie tax) than if they only withdrew the minimum until they turned 19 or 24.  Just think about it carefully.  

[TS61]

hmmm.   good point about the stacked RMD's being a concern.

I agree the county clerk should be the route.  I've talked to them several times and so far they've not been able to assist.  In fact they've bounced me around departments until I ended up back where I started.  It's a big county (over 4 million people).  Perhaps it would be simpler in a smaller place.  I also hit an attorney and his comment was likely the only route is to go the full financial guardian route through the court system.  So far there's no "file this form and you're good".

[TS61]

the problem, as it was explained to me, with just getting the paper without going through the full process is a bit like proving that ghosts do not exist.  While Texas law states that by default the parent is the financial guardian, you don't know if there is other paperwork overriding the default.  I could be some dead-beat dad behind on child support trying to make off with the child's inheritance.  Without doing the full court search you don't know what other rulings might be out there countermanding the default.....

[Opus 17]

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@TS61 wrote:

hmmm.   good point about the stacked RMD's being a concern.

I agree the county clerk should be the route.  I've talked to them several times and so far they've not been able to assist.  In fact they've bounced me around departments until I ended up back where I started.  It's a big county (over 4 million people).  Perhaps it would be simpler in a smaller place.  I also hit an attorney and his comment was likely the only route is to go the full financial guardian route through the court system.  So far there's no "file this form and you're good".

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I agree that you need to be appointed financial guardian.  But my thought is that the paperwork might be possible as a pro se.  

(Tangentially related, my ex-wife and I legally separated in NY using attorneys.  Once we decided to go all the way with the divorce, NY has a process to convert a legal separation to an uncontested divorce.  It wasn't just one form, but I was able to do it without an attorney, by following the instructions on the court web site.)

When it comes down to brass tacks, every legal action starts with at least one form, in this case asking the court for the appointment.

My main point is, there will be some cost of doing nothing and waiting.  Whether that cost is higher or lower than the cost of getting the appointment, is something you should consider as part of this process.

Good luck.