Can IRA donations satisfy RMD in the year after death?
To Alan and Mary Kay Foss, CPA:
An 80-year-old dies owning a TIRA with 8 beneficiaries: 4 universities ($100K, $50K, $50K and $50K) and the balance equally to his 3 sons. In his year of death, the IRA owner does not take any distribution but his RMD is satisfied by the post-death distribution in the year of his death to just 1 of the 4 universities. In the following year the other 3 universities receive their beneficiary shares and then later that year (but before December) his 3 son beneficiaries inherit their shares of the IRA.
Q. 1: Since the universities’ beneficiary shares in the year after the year-of-death would again exceed the RMD requirement, would the 3 sons be able to wait to the next year (the year after they inherit their shares) to take their RMD’s?
A 6/17/03 advisory by Mary Kay Foss, CPA, indicated that any disclaimer should be for all or a specific fraction of the primary beneficiary’s IRA inheritance(s) and NOT for a pecuniary/$ figure since a specific amount may trigger an income tax on that amount. And I believe this was still the case in Sept. 2008, illogical as that seems to me.
Q. 2: Is this still the case and, if so, who would be liable for any income tax since the universities are non-profit organizations?
Thank you.
Permalink Submitted by mk foss on Sun, 2011-11-13 22:39
When were the dollar amounts distributed to the charities? If before 9/30 of the year after the death, they are disregarded as beneficiaries – which is a good thing. There is no tax to the charities on receiving their shares of the IRA. If the charities are disregarded, then each son can open an inherited IRA by 12/31 and take a distribution based on his life expectancy. The distribution for each would be based on the individual’s share of the balance on 12/31 of the year of death.
Charities do not receive RMDs – they only go to beneficiaries with a life expectancy. Payouts to the charities in the year after the death have nothing to do with the beneficiaries’ requirement to begin RMDs that year.
If the charities were still beneficiaries on October 1 of the year after the death, then the individual beneficiaries cannot use their own life expectancies for determining RMDs – the life expectany of the deceased father would be used.
With a pecuniary amount left to charity, the IRA owner’s estate or trust is taxed. It’s as if the estate took a distribution from the IRA and then paid it to the charity.
Alan is likely to have more to say about this.
Permalink Submitted by Bruce Steiner on Sun, 2011-11-13 23:33
You would accelerate the income if the IRA were payable to the estate (or an administrative trust), and the estate (or administrative trust) assigned an interest in the IRA to satisfy a pecuniary bequest. But here the estate has nothing to do with the IRA. It’s payable to 4 charities and 3 sons (and an 8th beneficiary whose identity we don’t know).
It’s confusing to have a pecuniary amount payable from an IRA, since there’s no one in the role of executor who decides which assets to distribute in satisfaction of the pecuniary amount, or which assets to sell to raise the money to distribute to the recipient of the pecuniary amount. (The executor of the estate doesn’t have that power with respect to the IRA since it’s not payable to the estate.) It wouldn’t surprise me if some financial institutions would require that it be restated as a fractional share (even if the numerator is the desired amount and the denominator is the value of the IRA at date of death), or would treat it as a fractional share, or would reject it.
Permalink Submitted by Peter Lingane on Mon, 2011-11-14 00:53
It is my understanding
1. that a required distribution is with respect to the IRA and not the individual beneficiaries, although the nature and ages of the beneficiaries may influence the RMD amount.
2. that a large enough distribution from an undivided inherited IRA with multiple beneficiaries to any beneficiary satisfies the decedent’s RMD for the year of death.
3. that a large enough distribution to any beneficiary in the year after death satisfies the RMD for the undivided IRA for the year after death.
4. that individual beneficiaries are responsible for their own RMD after the IRA is divided. Depending on when the division occurs, the RMD factors might be the same for all beneficiaries.
Is this correct? Is this still correct if one or more of the beneficiaries is a charity?
Imagine an IRA with seven beneficiaries: 20% to University A, 10% each to Universities B, C and D and 16.67% each to three sons. The decedent dies and 20% is distributed to University A in the year of death, thereby satisfying the decedent’s RMD for the year of death. Distributions are made to Universities B, C and D in the year after death, thus satisfying the RMD for the year after death. The remaining IRA is then divided into three separate IRAs before September 30 of the year after death. Each son is responsible for the RMD of his share beginning with the second year after death.
Pretty slick, if it works.
Permalink Submitted by Alan Spross on Mon, 2011-11-14 01:17
Note:
This post does not address Peter’s post, will do that later if necessary.
I have a slightly different take on Q1. I agree that the RMDs can be aggregated among beneficiaries for the year of death (with respect to which interest takes the decedent’s remaining RMD requirement), but cannot be aggregated for the year following death. That would mean that the universities cannot satisfy the RMD for the sons for the year following death, so the answer to Q1 is No. With respect to decedent’s year of death RMD, if a charity takes out the balance the tax revenue is lost that the decedent would have provided if decedent completed the year of death RMD.
For the year following death the separate account rules with the 12/31 deadline trump the 9/30 deadline with respect to determining what the individual beneficiary RMDs should be. There are 3 sons, and for those who establish separate accounts by 12/31, they can use their own life expectancy for RMDs whether the university interests are distributed by 9/30 or not.
Now if 2 of the sons fail to establish separate accounts, I believe that their RMDs would be as follows:
1) If university interest is paid by 9/30, the 2 sons RMDs are based on the age of the oldest of the two and the son who established a separate account is disregarded (see above)
2) If university interest is NOT paid by 9/30, then the two sons must use the decedent’s remaining life expectancy, because they did not create separate accounts and there was a non individual beneficiary on 9/30
If a surviving spouse were also included as a beneficiary, they could roll over their interest by 12/31 and use their own life expectancy as IRA owner (this could be looked as the broadest version of the separate account rule).
The separate account rules do not apply to trusts, so for trust beneficiaries there is nothing to trump the 9/30 date .
Bruce,
So the “kenan gain” problem does not exist when there is no estate or trust receiving IRA funds? Just a question of asset splitting issues due to the pecuniary amounts?
Permalink Submitted by Bruce Steiner on Mon, 2011-11-14 01:44
If an estate satisfies a pecuniary bequest in kind, it’s treated as if it sold the asset. For example, if the decedent bequeathed $10,000 to A, and the estate distributes 100 shares of X stock, valued at $100 per share, but with a basis of $90 per share, to A in satisfaction of the bequest, it’s as if the estate sold the shares and distributed the cash.
While less common, the result would be the same in the case of a trust (it could happen if, for example, the trust provided income to the spouse, and at the spouse’s death, called for a distribution of a pecuniary amount to A, and the rest to or in trust for the children).
Gains within an IRA are not taxable, so even if the IRA were treated as having sold the asset and distributing the cash, the IRA would not be taxable on the gain.
Permalink Submitted by Peter Lingane on Mon, 2011-11-14 04:40
Having reread Choate (7th Ed., Chapter 1), it seems clear that that a large enough distribution from an undivided inherited IRA with multiple beneficiaries to any beneficiary satisfies the decedent’s RMD for the year of death. Her “Dorian” example (p. 105) satisfies the RMD for the year of death by a distribution to a charitable beneficiary for example. Prior posts on this site have supported this position.
Choate is less certain that a large enough distribution to any beneficiary in the year after death satisfies the RMD for the undivided IRA for the year after death. While she supports this conclusion, she says that it is “unclear.”
Choate cites Reg. 1.401(a)(9)-8, A-2(a)(2), in concluding that individual beneficiaries are responsible for their own RMD beginning with the calendar year after the year in which the IRA is divided.
The preamble to TD 9130, in a section entitled “Separate accounts under defined contribution plans” says “… the regulations have been modified to provide that if separate accounts, determined as of an employee’s date of death, are actually established by the end of the calendar year following the year of an employee’s death, the separate accounts can be used to determine required minimum distributions for the year following the year of the employee’s death.” Choate’s take is slightly different. She says (p. 112) that the division [b]will be effective[/b] (emphasis added) for purposes of calculating MRDs beginning with the year after the year of the participant’s death.
Returning to fairira’s Q-1. While it is aggressive, there is support for the position that that the three sons could assume that distributions to charity in the year after death allow them to wait until the second year after death to take required distributions so long as they did not divide the inherited IRA until the second year after death. Since the division would not be effective until the third year after death, the required distribution in the second year could be taken from any or all of the separate inherited IRAs.
Waiting until the second year after death to establish separate accounts means a common applicable distribution period for the separate accounts.
Permalink Submitted by Alan Spross on Mon, 2011-11-14 05:01
I agree that the IRS Regs are not very clear on WHO must take the second year RMDs. It appears to rest on the definition of “separate accounts”, ie. what is and what is NOT considered a separate account. The Regs are basically written for DC plans with a couple modifications for IRAs, mostly due to the spousal options.
It should be noted that if individual beneficiaries neglect to establish separate accounts by the end of the year following year of death, their RMDs will eventually be based on the decedent’s if death was post RBD, and they would be hit with the 5 year rule if the charities did not cash out by 9/30 of the year following death.
So even with the scenario that will would save the individual some tax deferral for the first couple of years, when the charity cashes out those individuals would be hammered with either the 5 year rule or in the case of death post RBD, with the deceden’t life expectancy.