Pension Lump Sum to an Estate

[Deerlord7]

I have an accountant reviewing this but curious if anyone else has any thoughts.  My father passed away last year after 50 years with the same company.  He had a sizeable pension that has paid as a lump sum to his estate.  He was not allowed to designate a beneficiary and was not married.  I am the executor and the estate is currently in probate.  The lump sum is being used to pay some creditors but the tax implications are unclear to me. We elected to not have any withholding at the time of the payment.  I wanted to rollover into an inherited IRA but we have just passed the 60 day mark and I am still unable to move those funds anywhere.  Am I too late to take any action to avoid a large tax bill?   Per his will, all estate funds go into a trust, I am trustee, so not even clear what the implications of that would be if I can roll over the funds into an inherited IRA.  

[LudwigVan_fan]

This is purely an opinion.  But, if the payment was made in a lump sum, and is in or will be in a trust, and you have passed the 60 days, I think there will be a tax bill on the lump sum.

[dmertz]

With no designated beneficiary, there was never any option to roll the lump-sum pension distribution over to an inherited IRA.  The only option in such case is a taxable distribution to the estate that is ineligible for rollover.

The distribution is reportable on an estate income tax return, Form 1041.  Generally, the taxable income will be distributed to the estate beneficiaries, in this case the trust, passed through on Schedules K-1.  The trust will then report the income from the Schedule K-1 on its own Form 1041 and, depending on the terms of the trust, potentially distribute this income to trust beneficiaries, passed through on Schedules K-1 to be taxed on the beneficiaries' tax returns.  The estate and trust each take a deduction for distributable net income and certain other deductions.  If any amount remains taxable to the estate or trust, the estate or trust is responsible for paying the taxes on that portion.

It's unfortunate, but may people make this major mistake of making their estate the beneficiary of plans like pension plans and 401(k) plans, leaving the estate beneficiaries with the unfavorable tax consequences.  Whoever set up your father's estate plan in a way that forced this lump-sum pension distribution likely taxable in a single year seems to have done less than ideal job.

[Deerlord7]

I am assuming the same thing, but just thinking through if this could have been avoided and if its still possible to do so.  The 60 days is the issue, if the money is in an estate bank account, until probate ends I am only supposed to touch that money to pay off creditors.  But maybe I am missing something. 

[Deerlord7]

Appreciate the response.  That was all my understanding as well, the issue is that his pension rules prevented him from designating a beneficiary.  The rules simply said either a spouse is the beneficiary or, as in his care, if unmarried the lump sum is only payable to the estate.  So that prevented him from designating a beneficiary.  I was just hoping to roll over into an inherited IRA and take the distributions over several years to lessen the tax burden, but I am not allowed to touch the money until probate ends which will be past the 60 day period.  I feel there has to be a workaround but not clear what that is. 

[dmertz]

Ah, you did say in your original question that the plan did not permit the designation of a beneficiary under the circumstances.  I forgot about that when I was replying.

There is no workaround.  This distribution to the estate is not permitted to be rolled over.

[Deerlord7]

Thanks, that's kind of what I was finding but very confusing on all this.  On the one hand if a rollover was never possible then nothing I could have done differently anyway, on the other hand, doesn't seem right that still wouldn't be an option, but seems more and more likely it is not.  

[LudwigVan_fan]

That is what happened in my family.  My brother passed away and some of the IRAs named beneficiaries and the money was rolled into decedent IRAs.

There were a couple of small IRAs that had no beneficiary and those went into the estate.  No possible rollover allowed.

[Deerlord7]

I appreciate the response, that is giving me some clarity then that there's not much we can do regarding the tax issue.  Appreciate the help. 

[dmertz]

@LudwigVan_fan , there are actually options for IRAs that are not available for a 401(k) unless the IRA custodian's IRA agreement says otherwise.  Because the inherited IRA must be moved by nonreportable trustee-to-trustee transfer (whereas a 401(k) has to be moved by reportable distribution and rollover), it is permissible to establish an inherited IRA for the benefit of the estate to avoid needing to take a distribution all in a single tax year.  The estate can then assign the inherited IRA out to inherited IRAs for the benefit of the estate's beneficiaries so that the estate does not have to remain open to receive annual distributions.

[Deerlord7]

In that scenario how do you manage that within the 60 day rollover window given that estates often take months to go through probate before funds can be moved?

[dmertz]

@Deerlord7 , I don't understand the question.  A trustee-to-trustee transfer of funds from one IRA to another does not involve the 60-day rollover deadline because it's not a distribution.

The only cases where the 60-day rollover deadline applies are when an individual receives a distribution that is eligible for rollover.  The deadline is measured from the date of receipt the distribution, not the date of death.  The funds stay in the original retirement account until they are moved.

[Deerlord7]

@dmertz @Per my original post this was not an IRA account. It was a lump sum payment from a pension.  It is now cash sitting in the estate bank account. That gives us 60 days to roll over into an inherited IRA but the estate account cannot be closed until probate ends, well after 60 days. That’s my issue. Not sure how to get manage that. 

[dmertz]

"That gives us 60 days to roll over into an inherited IRA"

No!  A distribution paid to an estate is NEVER permitted to be rolled over to an inherited IRA.  The money can only be paid to the estate beneficiaries.  The tax liability income is normally passed through to estate beneficiaries on Schedules K-1 (Form 1041).

[Deerlord7]

@dmertz that used to be correct but various changes to rules over the past few years have added confusion to this topic and I’ve gotten different answers from all involved. I was advised by Fidelity, who managed the pension, that a trustee to trustee transfer of the funds to an inherited IRA may be possible. Furthermore, any tax liability will be paid by the estate itself and not the beneficiaries. This is what I’ve been told, but everyone gives a slightly different anyway. Doesn’t help that it’s also rare for a pension to pay out to anyone other than a spouse.