Multiple Beneficiary Options

Submitted by Edward Kofman on Wed, 2015-02-25 00:50

A new client is a 50% beneficiary of her deceased husband’s IRA. He was age 59 when he died recently. It is a second marriage for both of them. The other beneficiaries for the other 50% of the IRA are the deceased husband’s 3 children ages 25 to 35. Two of the children are named outright as benes and a Special Needs Trust (SNT) is named as the beneficiary for the youngest child’s portion. I am seeking the best options for all of the benes.

I understand that since the spouse wasn’t named as the sole primary bene that she can’t do a spousal rollover and the best she can do is set up an inherited IRA which would require RMDs. Normally, we would suggest setting up inherited IRAs for the two children named as outright beneficiaries so that they could manage their portion with as much tax control as possible, but what about the portion that is to go to the Special Needs Trust? Does having a non natural person bene like a SNT have any effect on the options for the other bene’s. Aren’t we looking at RMDs based on the age of the oldest bene (ie. spouse, age 58)for all of the benes including RMDs for the SNT? Any other considerations for the options for the SNT or other benes? Thanks for any advice you can provide. EK



Submitted by Alan - IRA critic on Wed, 2015-02-25 04:37

  • The surviving spouse still has broad options. She can establish a separate inherited IRA account for her share and does not have to take an RMD until decedent would have reached 70.5. This can be done because the separate account allows her to be treated as a sole spousal beneficiary. This will also permit penalty free distributions if she is not yet 59.5. Or she can roll her share into her own IRA at anytime and be treated as the owner, but should not do that until she reaches 59.5.
  • Likewise, the two named outright can also establish separate accounts by the deadline and use their own life expectancies. This is critical given the trust beneficiary which may or may not be qualified for look through treatment.
  • If the SNT is qualified and a separate inherited IRA is established by the deadline, the SNT can take RMDs using the oldest beneficiary of the SNT including remainder beneficiaries. If not qualified, the 5 year rule will apply to the SNT.
  • In summary, the separate account rules allow the same flexibility for the non trust beneficiaries as they would have had otherwise, but the separate account deadlines become more critical.

Submitted by Edward Kofman on Thu, 2015-02-26 00:51

Alan,  thank you for your thorough answer.  These options are better than I first expexted.  I assume the spouse would not combine the inherited IRA into her own until age 59.5 to avoid the early withdrawal penalty just in case she would need a distribution before that time.  Is the rule with multiple beneficiaries taking distributions based on the life expectancy of the oldest only applicable if the account is NOT split into separate accounts for the beneficiaries?  If the IRA owner wants to leave IRA funds to a charity I recall from somewhere that it is better to carve off that piece into a separate IRA so as not to disrupt any distribution options for living beneficiaries, like children.  Does that make sense?  These cases with non-traditional beneficiaries highlight how many nuances there are and how much there is to learn.  Thanks.  EK

Submitted by Alan - IRA critic on Thu, 2015-02-26 01:23

EK, yes, the oldest beneficiary determines the RMD divisor for those who fail to create separate inherited IRA accounts by the deadline, and this also applies to trusts because the separate account rules do not apply to trusts in any case. Creating additional IRA accounts while the owner is alive is a way to eliminate the risk that the beneficiaries may fail to meet the separate account deadline or pay off a charitable beneficiary by 9/30 of the deadline year. When a charitable beneficiary is included or a non qualified trust, the failure to create separate accounts by the deadline will evoke the 5 year rule if the IRA owner passed prior to the RBD, or if owner passes after the RBD, RMDs would be based on the remaining life expectancy of the decedent.

Submitted by Tom Reiter on Thu, 2015-03-05 21:14

Alan-iracritic in the above Wed, 2015-02-25 response, suggested creating additional IRA accounts for multiple beneficiaries.  I have eleven grandchildren named on my Vanguard traditional IRA as beneficiaries.  Should I divide my total IRA account amount into eleven separate accounts with 1/11th of the total amount in each account?  Vanguard’s spokesperson told me that creating 11 trustee to trustee accounts with 1/11th the amount in each would not be a problem for them.  What problems could arise with the way I presently have my IRA setup?

Submitted by Alan - IRA critic on Thu, 2015-03-05 22:18

This is a classic question of comparing the inconvenience to you while living of maintaining 11 equally invested IRAs vrs the issues the beneficiaries will have in creating separate accounts by the deadline after you pass. At least there are no non individual beneficiaries so the worst thing that would happen if for example 3 of them failed to create separate accounts by the deadline would be that the 3 would have to use the life expectancy of the oldest of the 3. I don’t know if VG will try to get them to coordinate the separate accounts request so all 11 would be created at the same time or whether they will set up the inherited accounts one by one as the papers are returned by each beneficiary. If I were you, I think I would just maintain a single account, but leave detailed instructions with each GC or their parent on what to do after your death.

Submitted by [email protected] on Thu, 2015-03-05 23:05

There may also be separate custodial fees if you maintained 11 separate IRAs, depending on custodian.

Submitted by Tom Reiter on Fri, 2015-03-06 13:46

Thank you for your comments and recommendation.  This forum is excellent for all of our questions.  I am glad to have found this service.  I have found that Vanguard is very helpful also.  They have a department that handles IRA beneficiary help to its clients.

Submitted by lou kartsonis on Sun, 2015-03-08 22:06

I understand it’s not a good idea to designate one’s living trust as the beneficiary of an IRA because of tax implications. I have two IRAs (traditional and Roth). May I designate institutions as the beneficiaries (e.g. church, school), and assign percentages of the IRAs’ assets to each one? If yes, are there any drawbacks to such an arrangement? Thank you.

Submitted by Alan - IRA critic on Sun, 2015-03-08 23:09

Yes, you can name non individual beneficiaries such as a charity, and because the charity will not pay taxes it is more typical that a TIRA would be left to a charity and a Roth IRA to an individual who would benefit from the tax free distributions. It is also not a problem to name a trust as beneficiary if you have specific reasons for doing so and the trust is qualified for look through treatment. If you name an individual and a trust as beneficiaries of the same IRA account, the individual must create their separate account by the deadline to avoid losing their stretch. 

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