Many persons are surprised and shocked to learn what happens when retirement account holders neglect easy details about tax law and their accounts.
A have a look at some recent court cases illustrates the points.
The most up-to-date case involved the 401(k) of the late Jeffrey Rolison, who worked at Procter & Gamble for greater than 30 years and collected a 401(k) balance of over $754,000.
When he enrolled within the 401(k) program in 1987, Rolison named his live-in girlfriend as the only real beneficiary. They separated two years later.
From 2002 to 2014, Rolison had a nonmarital relationship with a co-worker and named her as a beneficiary of his life insurance and medical insurance advantages, but never named her as a beneficiary of the 401(k).
Rolison died in 2015. The 1987 girlfriend was still listed as the only real beneficiary and was alive, so the 401(k) administrator paid her the account balance.
Rolison’s brothers sued as co-executors of his estate and demanded that the advantages be paid to the estate.
The second friend also sued, saying her status as a life insurance and medical insurance beneficiary showed that Rolison’s intent was to inherit the 401(k). The second friend’s lawsuit was dismissed because she was never a beneficiary of the 401(k) and had no legal status that would give rise to an expectation of rights to the account.
The brothers alleged that Procter & Gamble breached its fiduciary duties or was negligent by failing to make it clear to Rolison that the previous girlfriend remained a beneficiary of his 401(k).
However, the corporate revealed that it had sent Rolison quite a few communications over time advising him to review who was listed as a beneficiary and alter them if vital. The messages included instructions for accessing the account online.
The court ruled that the employer had no obligation to specifically remind an worker who was listed as a beneficiary. The company was also in a position to show that Rolison had logged into his 401(k) account multiple times, giving him the chance to review and alter his beneficiary designation.
The estate lost the case and the balance of the 401(k) went to the previous girlfriend. The estate also likely spent significant sums on litigation. (Procter & Gamble US Business Services v. Estate of Jeffrey RolisonCase No. 3:17-cv-00762, MD Pa.)
A case with similar issues involved the second spouse of a deceased 401(k) owner and the youngsters from his first marriage.
The 401(k) owner designated their children as co-beneficiaries of the account.
The employer was later acquired by one other company and the 401(k) assets were transferred to accounts in the brand new employer’s 401(k) plan.
The owner apparently did not submit a brand new beneficiary designation to the brand new employer. Under the principles of the brand new 401(k) plan, if a plan member did not name a beneficiary, the surviving spouse (if any) can be the only real beneficiary of the account.
After the worker’s death, the plan administrator informed the widow that she was the only real beneficiary.
The children filed a grievance with the administrator. The administrator rejected the youngsters’s claim and asked a court to come to a decision who the beneficiary was.
The deceased owner’s previous actions and the terms of his will indicated that he intended his children to inherit all or most of his assets. However, the court explained that in a professional pension plan, only essentially the most recent beneficiary designation within the administrator’s records is critical.
The children also argued that the previous employer’s beneficiary designation must have been applied. However, the deal between the employers didn’t involve merging the 2 plans. The latest employer’s plan was a separate plan and a brand new and separate beneficiary designation was required.
The court ruled that the widow was the only real beneficiary. (Children Morgan v. Crout5Th Cir., No. 19-20037)
People are sometimes surprised by the powers of a 401(k) administrator or IRA trustee, particularly the ability to terminate an account, distribute the assets, and collect taxes from the owner.
In one case, an IRA owner moved and the custodian didn’t receive notice of the brand new address.
The custodian sent a letter to the owner on the last address stating that the custodian can be withdrawing from the account attributable to inactivity with the IRA and lack of contact with the owner.
When the owner didn’t respond with instructions on tips on how to handle the account, the custodian distributed the balance by notifying the issuers of the securities within the account to alter the owner’s name from “custodian” to “account holder.”
The custodian issued a 1099-R declaration of the distribution. The documents were sent to the owner’s address on record. None of the correspondence was forwarded to the IRA owner.
The IRS had the present address and sent the taxpayer a notice of additional taxes for not including the IRA distribution in gross income.
After consulting together with his CPA and completing lots of paperwork, the IRA owner transferred the distributed assets to a different IRA. The CPA then wrote to the IRS requesting that it waive the 60-day limit for a tax-free rollover and accept the rollover as a tax-free transaction.
The IRS ruled in favor of the IRA owner, so no additional taxes or penalties were due. However, to avoid the taxes, the taxpayer needed to do lots of work, pay their auditor’s fees and pay a $10,000 fee that the IRS charges for tax assessments.
An analogous series of events involving the late actor James Caan had less positive outcomes, which I even have discussed previously.
An essential lesson is that an IRA custodian may resolve to stop serving as custodian or resign as custodian of a selected account. If that is the case, under the terms explained within the IRA documents and which few people read, a custodian can close an IRA and distribute the assets without the IRA owner having to do anything.
A typical provision states that the IRA custodian may terminate and shut the account 30 days after notifying the IRA owner of the intent, giving the IRA owner time to transfer it to a brand new custodian.
If the custodian doesn’t receive instructions from the IRA owner inside 30 days, the account can be closed and the account balance distributed. Typically, a check is mailed to the IRA owner’s last known address or title to stocks or mutual funds is transferred to the IRA owner’s name.
The custodian also sends a Form 1099-R to each the IRS and the owner listing the account balance as a distribution.
The IRA owner must include this amount in gross income for the yr unless he or she will be able to roll it over to a professional retirement account inside 60 days of the distribution.
Sometimes the assets are transferred to a state’s unclaimed real estate fund. The owner must then undergo the federal government process to return the assets.
It is significant that your IRA administrator and 401(k) administrator have your current address. Read all communications from them. Be aware of any instructions and deadlines within the communications and make sure you respond in a timely manner.
