Q: My mother died in February, and I am her beneficiary. I was told that I could not roll her 401(k) into an IRA or take the distributions over a period of time, but must take a lump-sum distribution. The result will be a large tax liability for me. But the distribution of the 401(k) has hit some snags (there is an open police investigation into the cause of her death), and it may not be complete until early 2007. Is there any way I can avoid taking a lump-sum distribution, given the apparent change in the law starting next year? After reading your Oct. 8 article, I asked the plan administrator, and they said no. But this wouldn't be the first time someone who is supposed to know the facts doesn't. -- F. B., November 2006, via e-mail
A: Not to minimize your tax concerns, but the real attention-grabber here is that open police inquiry. It raises the intriguing question of how suspected foul play may affect the distribution of an inheritance.
But let’s start by answering the question you asked.
The 401(k) plan administrator may not be familiar with the new law, called the Pension Protection Act of 2006. That law is unambiguous: After Dec. 31, 2006, a non-spouse beneficiary can roll the distribution of an inherited 401(k) account into an IRA, regardless of when the original account owner died.
If your late mother's 401(k) isn't distributed until 2007, you can roll the lump sum into an IRA, says Bob Walter, a principal and benefits consultant at Buck Consultants in Secaucus, N.J. You can then take taxable annual IRA distributions based on your own life expectancy.
That would save you a lot of money.
But you can't compel the plan to delay the distribution just because the law will change, he adds. A 401(k) plan is obligated to follow its own rules. And most plans require the payment of lump-sum distributions to non-spousal beneficiaries "as soon as practicable after death."
In this case, there has been a delay – and your letter implies that's because of the police investigation.
It's possible that investigation has delayed the issuance of a death certificate, says Walter -- and no 401(k) plan administrator would make a beneficiary distribution without seeing a death certificate. But if the death certificate has been issued, he adds, the fact that there's an investigation wouldn't hold up the 402(k) distribution.
Insurance companies, which are state-regulated, automatically delay distribution of assets when a death is being investigated by the police, because state law doesn't allow anyone to benefit from a crime, says William Cornachio, a partner at Rivkin Radler, a Uniondale law firm. But a 401(k) plan wouldn't normally delay a distribution to comply with state law, says Walter, because 401(k) plans are federally regulated.
(Of course, a life insurance company that delays payment of a death benefit isn't passing judgment on the beneficiaries; it's just waiting until a court sorts things out. Should it turn out that an heir is convicted of murder, he wouldn't be allowed to benefit from his victim's policy.)
But a civil verdict of wrongful death might not prevent a beneficiary from inheriting from the person whose death he caused, adds Cornachio. The reason: a wrongful death may be the result of pure negligence rather than an intentional act.
"Causing Dad's death because you backed the car out of the garage and didn't see him in his wheelchair in the driveway might not bar you from inheriting," he says. "Driving head-on and hitting Dad in his wheelchair at 30 miles an hour – yes, that probably would bar you from inheriting."
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