By Andy Ives, CFP®, AIF®
A financial advisor contacted me about her client who had recently passed away. The advisor was legitimately concerned about a rollover check received by the now-deceased individual. It had not been deposited into his IRA prior to death. Was her client’s estate stuck with a taxable distribution? Could the financial institution refuse the rollover because the person was no longer of this earth?
If an IRA owner or plan participant takes a distribution, but then dies while the money is still outside of a qualified account, his executor (or those responsible for his financial affairs) may roll that distribution over. In a court case from way back in 1982, an employee took a distribution from his work plan but died before rolling it over. The court allowed his executor to roll over the distribution.
However, in a different scenario with different circumstances, the IRS made an opposite ruling. A plan participant established a traditional IRA and requested a direct rollover from his work plan to his IRA. But he died before all the assets were liquidated and, more importantly, prior to the money being distributed. The IRS denied the rollover, presumably because the rollover was never initiated, i.e., the assets had not yet been paid out.
Or course, rollovers must be completed within 60 days of receiving the distribution. If a person dies while the distribution is still in his possession, this deadline can sneak up on beneficiaries. Oftentimes, the original distribution is not even discovered by the beneficiaries until well after the 60-day period has expired. As such, numerous requests have been filed with the IRS asking for an extension of the 60-day window. The IRS has been generous and, on many occasions, allowed late rollovers due to the death of the IRA owner or plan participant.
In 2016, the IRS began allowing certain late rollovers if the account owner provided the receiving financial institution with a “self-certification” letter. However, “death of account owner” is not one of the IRS’s 11 acceptable self-certification excuses. (“One of my family members died” is the closest option within the 11 reasons.) While death of the IRA owner is not specifically listed, it might still pay to use self-certification since the IRS has consistently allowed such late rollovers by surviving spouses.
The death of any individual is a traumatic event. Thankfully, the IRS appears to have a heart when death occurs during a rollover.