Life Expectancy for Inherited IRA
Scenario: A husband takes his IRA RMD and dies. His spouse IRA beneficiary dies 1 day after submitting inheriting paperwork to Vanguard. Vanguard learns of her death just before her paperwork arrives and therefore creates an inherited IRA in the name of her estate. Her estate executor asks Vanguard to create inherited IRA’s for her sons.
Q,: I believe the sons must use the deceased’s life expectancy for the year of her death for their RMD’s or may they use their individual life expectancies?
Thank you.
Permalink Submitted by Alan Spross on Sun, 2010-02-07 17:59
These situations get very complex.
1) Did husband die after his RBD? Note that he could have taken an RMD and STILL have passed PRIOR to his RBD.
2) When did surviving spouse die in relation to husband? eg. same year, following year before 12/31, or later?
3) “Inheriting paperwork” contemplates surviving spouse continuing as beneficiary or assuming ownership?
Permalink Submitted by Anonymous (not verified) on Mon, 2010-02-08 18:05
My analysis:
The spouse died before the paperwork reached Vanguard. Therefore, there was no beneficiary named for the spouse, who owned the IRA before her death. I must assume that Vanguard’s default beneficiary order (per disclosure agreement) is Spouse then Estate. I would check if children are also not in there somewhere. I am guessing No.
Then the RMD rules (pre or post RBD) for an IRA owner who has the Estate as beneficiary applies:
Pre – all sons 5 year
Post- all sons remaining LE of desceased spouse – [u]I will assume this one [/u]
pko
Permalink Submitted by fairira on Wed, 2010-02-10 08:30
alan-oniras and pko1068366, thank you and please accept my apologies for not providing adequate information. A more detailed scenario follows with several questions.
The husband died after his RBD and after taking his IRA RMD for the year. His surviving wife dies in the same year and just 1 day after submitting her “inheriting paperwork” to Vanguard to assume ownership of his IRA of which she is the primary beneficiary and their sons are the secondary beneficiaries. Her “inheriting paperwork” names their sons as primary beneficiaries and asks that her husband’s IRA assets be assumed into her own Vanguard IRA which already designates the sons as primary beneficiaries.
Vanguard learns of her death just before her paperwork arrives and therefore creates an inherited IRA in the name of her estate. Their position is that in these circumstances they cannot create an IRA in the name of a dead person, the wife, but will create it as an inherited IRA in the name of her estate since she was the IRA’s living beneficiary when her husband died. If the estate-inherited IRA is created, Vanguard will subsequently comply with a request of an estate executor with Letters Testamentary to use the IRA’s assets to create inherited IRA’s for their sons.
There is no default to any family member in Vanguard’s IRA disclosure agreement. If no beneficiary is named, the only default beneficiary is the estate of the owner. In the above scenario of the beneficiary wife dying before Vanguard’s receipt of her inheriting paperwork “in good order,” the IRA ownership defaults to her estate. If successfully disclaimed by the wife’s estate executor, the husband’s IRA assets would then default to the husband’s estate and not to their sons because his primary beneficiary wife was alive when her husband died and she did not disclaim his IRA.
The husband and wife had previously sent Vanguard a “Letter for the Record” that stated their intent that none of their IRA’s should go into either of their estates but should be inherited as IRA’s only by their primary beneficiary spouse or by their 3 sons, who are either the primary or the secondary beneficiaries of their IRA’s. Unfortunately, this does not alter Vanguard’s plan to create the inherited IRA in the name of the wife’s estate.
Q. 1: Is there some other type of declaration with more legal weight that could preclude their IRA’s going into the spouse’s estate?
Q. 2: Can you please provide your thoughts on how else one might persuade Vanguard to put the husband’s IRA assets directly into inherited IRA’s for their sons, whether as inherited from him or from her, and to not put them into the wife’s estate even temporarily? Otherwise, there will be the complications in California of having to get court appointment of an executor for her estate and of making a non-probate asset into a probate asset with resultant delays in a backed-up probate court and with significant legal expense.
Q. 3: If this still ends with the sons getting inherited IRA’s through the estate, may they use their individual life expectancies or must they use their mother’s life expectancy for the year of her death?
I appreciate your help.
Permalink Submitted by Bruce Steiner on Wed, 2010-02-10 15:18
You might look at whether W’s mailing in the papers during her lifetime was sufficient. If so, it’s W’s IRA and it goes to her beneficiaries.
If W’s mailing in the papers during her lifetime is not sufficient, you might look into whether W’s executors can disclaim the IRA. In some states, an executor needs court approval to disclaim on behalf of a decedent, but the court should permit it if the beneficiaries consent.
You might also look into whether it might be helpful to request a private letter ruling.
Getting an executor qualified is generally a routine matter.
Please note that this, like any post in this or any other discussion board, is for general information only. You should consult with competent tax/estates counsel who can give you specific advice based upon the particular facts and your objectives.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Anonymous (not verified) on Wed, 2010-02-10 19:01
My analysis given is still the same.
Vanguard will probably not change their stance, since the paperwork did not arrive and was not processed before her death. Thus, the account went to the wife’s estate. Vanguard will still need an excecutor of [u]her[/u] estate to direct the assets be passed to the sons into separate Inherited IRAs – typically their requirements will be Letters of Testimentary and an authorized executor to direct the assets to go to the sons; each son will need to fill out a new IRA Account Form. You might be able to get them to accept less stringent requirements. That may come down to the asset level they have…..Unfortunately that is how it ends up all the time.
The fact that the Inherited IRA in the name of the estate is already set up is really irrevelevent here. If the above mentioned, paperwork would all arrvive together, they would simply not set it up and the sons would open Inherited IRAs directly. No tax reporting would occur in any scenerio – ie. the transfer(s) simply flow to the destination of the Inherited IRAs for the sons. Then, the estate RMD rules would apply (remaining LE of deceased wife for all sons).
A PLR is an option as bsteiner mentioned.
pko
Permalink Submitted by Alan Spross on Thu, 2010-02-11 00:03
I am coming up with a different RMD scenario here based on the following:
1) Assumption that there is no grounds for considering the surviving spouse as IRA owner, thereby locking in the IRA status as inherited.
2) Original owner passed after his RBD, therefore the RMD option is the longer of the surviving spouse’s life expectancy which due to her death would not be recalculated and the non recalculated remaining life expectancy of the deceased husband. We still do not know her age and therefore do not know which non recalculated life expectancy would be greater.
3) Surviving spouse then passes in the same year and her estate becomes a successor beneficiary because she was not deemed owner. Successor beneficiaries do not change the original RMD schedule (see Ref below). Therefore, whichever was the younger parent’s remaining non recalculated life expectancy would apply to the estate and therefore the estate beneficiaries after the IRA was assigned to them. They would not be able to use their own life expectancies.
Ref: “Death of Beneficiary”, Pub 590, top of p 36.
I noted in my Vanguard IRA agreement, that the trigger date for acceptance of beneficiary changes is the “date received by Vanguard”. In some deathbed situations it would not be unheard of to have a beneficiary change hand delived to a local Vanguard office and a receipt time secured by the messenger. However, I did miss the statement that the papers had NOT even arrived at Vanguard and that is conceded. Therefore, Vanguard’s action in setting up an estate IRA is consistent with their IRA agreement.
About the only way around this that I could see would be a state statute or court ruling that runs contrary to the above, but if there is enough money here, it might be investigated as Bruce indicated. I can’t see a PLR request here as more than a waste of resources. The sons are still going to get some stretch, but far less than if they had been designated primary on an owned IRA.
Permalink Submitted by fairira on Fri, 2010-02-12 00:51
Alan, after many years of seeing your knowledgeable posts, I respect you as a reliable IRA expert and readily accept your statement that the RMD option in my scenario would be the longer of the husband’s and wife’s non-recalculated life expectancies. The original IRA owner was 82 at his death and his spouse was 80 at her death so her non-recalculated life expectancy is the greater.
But I am still uncertain re several of the Pub. 590 (for 2009) rules for the scenario in my post and hope you will clarify these for me.
You mentioned “Successor beneficiaries do not change the original RMD schedule …” and gave the reference “’Death of Beneficiary’, Pub 590, top of p 36.” I take it that the estate is the first successor beneficiary and the sons will be the succeeding successor beneficiaries. However, since this paragraph is a part of the section “Owner Died Before Required Beginning Date,” I wondered if the paragraph is applicable to my scenario where the Owner died after his RBD.
Re a paragraph for the latter situation on p. 35 which refers to the “owner” and to the “designated beneficiary”:
Q. 1: I assume that the “owner” here can only be the husband. His wife tried to assume the IRA which would have made her the owner but she died beforehand so her estate became the IRA beneficiary and presumably not the owner.
Q. 2: Could the sons be considered the “designated beneficiary” if they are the beneficiaries of inherited IRA’s (via the estate) on Sept. 30 of the year after their parents’ deaths? They were designated as primary beneficiaries in their mother’s paperwork attempt to assume her husband’s IRA, as well as secondary beneficiaries in the husband’s IRA, but presumably that’s all irrelevant. While expecting the answer to Q. 2 is “no,” I ask because I think that the sons could use their single life expectancies if they could be considered the “designated beneficiary.”
Finally, please comment on the pros and cons of a trust that I think could avoid creating a probate asset and could ensure that in the event of the untimely death of the mother, the sons could set up inherited IRA’s using at least the life expectancy of the oldest son.
Thanks for your help.
Permalink Submitted by Alan Spross on Fri, 2010-02-12 03:31
Your questions are well thought out and logical. Part of the problem here is that you will find that Pub 590, p 35 should have a new sub heading beginning for the final paragraph “date the designated beneficiary is determined”. That paragraph and those following are NOT limited to deaths Before the RBD as the larger type would lead you to believe. It seems like Pub 590 follows a similar design of the actual IRS Regulations section in the following link:
http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A…
Note that Q&A 5 deals with both deaths before and after the RBD and then continues on to other rules just like Pub 590 does. So this design flaw actually started with the IRS Regs and was copied into Pub 590. It is a design flaw because all those paragraphs apply to both deaths before AND after the RBD except for “death of surviving spouse”
which addresses a situation that can only exist if the original owner passed prior to the RBD.
Further down in Q&A 5 is a section addressing successor beneficiaries which applies in all cases. A successor beneficiary can never get a longer stretch than that available to the designated beneficiary or a non individual beneficiary or some IRAs would end up stretched over multiple generations and the IRS would have to wait that long to receive the taxes. (see Q&A 7 – (c)2). The same is true of a trust or estate. Trust beneficiaries can be treated as designated for RMDs but only if the trust is a named beneficiary and not a successor beneficiary. In other words, the trust must be established by the IRA owner or by the owner’s will, not by a subsequent beneficiary.
Q 1 – Agree. I think there is no way given the circumstances here that the surviving spouse could be viewed as the IRA owner since the papers were late and there were no defaults that would have made her owner by default. That makes the estate a successor beneficiary, but even if she had named her estate as beneficiary, the estate beneficiaries would never be allowed their own stretch.
Q2 – Short answer No, not even if she had named them as successor beneficiaries. A designated beneficiary must be designated by the owner and she never owned the IRA.
Permalink Submitted by fairira on Fri, 2010-02-12 22:53
Alan and the others who posted,
Many thanks for all the helpful information.