IRA of deceased spouse

Submitted by Jason Hochstadt on Fri, 2016-07-01 21:15

Hello,

Assume the following: Married couple; Wife is 78; has 2 Traditional IRAs (at 2 custodians) worth around $1.5M. Husband is 80; has 2 Traditional IRAs worth around $1.8M. RMDs are being taken on a quarterly basis (03/15; 06/15; 09/15 and 12/15; respectively). Husband and wife are primary beneficiaries for each other’s IRAs; there are contingents but assume no disclaimers are done for purposes of the below.

If wife were to pass away now:

1. For her 09/15 and 12/15 RMDs, must these be taken within her IRA (meaning her IRA cannot be entirely transferred until after the final 2016 RMD has been taken)?

2. For Husband, given the ages it would appear there is no benefit for him to take over the Wife’s IRA as an Inherited IRA. He should do a direct rollover, on a trustee-to-trustee basis, into his IRA so that he is in complete control of the beneficiaries (as he may make changes to his own IRA), to take smaller RMDs from the Wife’s IRA based upon the Uniform Lifetime Table (versus the Single Life Table) and to consolidate the IRAs. Is this correct?

3. Since Rollovers among spouses may take place at any time (per my understanding – there is no time constraint/deadline), given the above facts, however, is there any reason not to do the Rollover immediately (subject to #1) unless they want to wait the 9 months and vet this further in case the Husband wants to enact a partial disclaimer?

4. To the extent the Wife’s IRAs stay in tact thru 2016 and into 2017, for purposes of the 2017 RMD will it be computed based upon the Husband’s life expectancy as primary beneficiary under the Single Life Table?

5. Any other important items/facts regarding the above we should be focused on?

Thanks.

Jason



Submitted by Alan - IRA critic on Sat, 2016-07-02 01:12

  1. If the transfer is a direct trustee transfer, there are not reportable as distributions and the current year RMD does not have to be taken out before doing the transfer. But many custodians think it must be.
  2. Correct. Starting in 2017 his RMD will be based on his age and account balance as of 12/31/2016. If he does the rollover after 12/31, the RMD for 2017 will be the same, as the inherited IRA year end 2016 balance would have to be added to the year end balance of his own IRA.
  3. No reason not to do the rollover now in most cases. If the inherited IRA has a high basis % and his own IRA does not, he may want to take the year of death RMD from the inherited IRA before the transfer to get a lower taxable amount on that RMD. Note that taking the year of death RMD does NOT invalidate a later disclaimer per an IRS revenue ruling about 10 years ago.
  4. No, see item 2 above. If he does the transfer in 2017 he is still treated as if he owned the IRA for the entire year 2017, so would use the Uniform Table.
  5. Just in case, he should still name his own successor beneficiary on the inherited IRA ASAP even if the transfer will be done shortly thereafter. He should also update the beneficiary on his own IRA ASAP. If he inherits any basis from spouse’s IRA, that basis would be added to his IRA when the transfer is done. It is reported on line 2 of Form 8606.

Submitted by Jason Hochstadt on Tue, 2016-07-05 13:42

Hi Alan,  Thanks for the reply.  For #1, I just want to clarify.  Wife has $100k of RMD’s (assume).  A total of $50k (for the first 1/2 of 2016) was already taken.  For the remaining $50k (to be taken in Sept. and Dec. of this year), are you saying that the remaining spouse has the option of (1) having the deceased spouse’s IRA remain open, have the remaining 2016 RMDs taken there and then transfer directly the IRA into his own, OR (2) do a direct trustee to trustree transfer NOW, and then have the remaining spouse take the $50k remaining for 2016 from his own IRA?  I’m confused as, presumably, the remaining 2016 RMDs need to be taken from some account. For #3, the clients have no records of basis so, presumably, this would be a moot point.   Good to know on the dislcaimer ability in the event of a year of death RMD – I assume this is applicable to either full or partial disclaimers.  Understood for #4 – so whether he does the transfer in 2016 or 2017, he uses the Uniform Table for his 2017 RMD.  However, the benefit of doing the transfer now is based upon the info. in #2 above.  For #5, how does he name a successor beneficiary w/o creating an Inh. IRA?  If he creates an Inh. IRA, is there any problem/implication in terms of RMDs since he’d have to take a greater $ amount relative to if it’s in his own IRA – and couldn’t he do the Rollover in the same amount of time as needed to establish the Inh. IRA and rolling into that?   Also, is it critical that his beneficiaries be updated on his IRA if he’s fine w/ the contingents (spouse was primary but now deceased – so would flow to contingents as-is)?Thank you!  Jason

Submitted by Alan - IRA critic on Tue, 2016-07-05 17:37

  • Jason, yes surviving spouse has both options 1 and 2 for completing the year of death RMD for deceased spouse. 50k must be distributed by year end either way. Custodians may push for Option 1 because it is obvious that it meets RMD requirements, whereas Option 2 requires parsing through some difficult to understand Regs. But Option 2 is used in many cases and the IRS has no problems with it. Of course, Option 2 only works for a direct transfer, not a 60 day rollover.
  • Yes, 3 applies for partial disclaimers as well.
  • An inherited IRA must be established by submitting a death cert and beneficiary name, address and SSN in order to be officially recognized as the beneficiary and allow the custodian to take directions from the beneficiary with respect to any distribution, transfer, investment change, or the naming of the successor beneficiary. Typically, beneficiary would supply the name of the successor beneficiary at the same time the inherited IRA is being retitled. The direct transfer out of the inherited IRA can then be done immediately or any time thereafter. During the year of death the RMD for that year is always the decedent’s RMD, so any changes do not affect the amount of that RMD. But starting in the first year after the year of death, the RMD amount is affected by whether  it remains in inherited status that entire year or if it is transferred or rolled into an owned IRA. Generally, an owned RMD is lower than an inherited IRA RMD. In other words, the surviving spouse could set up an inherited IRA now, and not roll it into his own IRA until Dec, 2017, and his 2017 RMD would be based on owning the IRA, not the inherited RMD rules due to the rule that the surviving spouse is treated as if they owned the IRA the entire year (applies in any year after the year of death, but not the year of death itself). That said, if the survivor passes before rolling to their own IRA, the successor beneficiary does not get a new stretch, and will have to continue the RMD schedule of the surviving spouse. If rolled over, the beneficiary will then be treated as a designated beneficiary and be able to use their own life expectancy.
  • For HIS IRA, he does not have to update the contingent beneficiary for the contingent to inherit, but then there is no contingent beneficiary to the current contingent should the current contingent pass. For HER IRA, her contingent is voided at her death, husband inherits it and then there is no contingent unless he names his own successor and perhaps his own contingent beneficiary.
  • Sometimes a beneficiary can get bailed out by the rule that for a sole spousal beneficiary that fails to take an RMD required as beneficiary, that spouse defaults to ownership of the IRA. For example, in your example, if she passes and HE sets up the IRA as inherited and names his own beneficiary, but FAILS to take his full RMD for 2017, he defaults to ownership status. That means his beneficiary receives a new stretch when he passes. But if he took his beneficiary RMDs (even though higher than necessary) and then passed, his successor beneficiary would NOT get a new stretch and would have to continue his RMD schedule. Therefore, it is preferable to take ownership ASAP unless there is a specific benefit to waiting.
  • Not sure I answered all your questions…………….?

Submitted by Jason Hochstadt on Tue, 2016-07-05 19:40

Hi Alan, Thank you so much for the timely response!  Understood and appreciate the feedback and info.Last question:  Any reason for the remaining spouse, when he takes ownership of the decedent spouse’s IRA, not to do the direct trustee-to-trustee transfer into his existing IRA(s) (assume no reason not to from a beneficiary desgination perspective)?  Is there a preference to setting up a new owned IRA and having the decedent’s IRA get transferred into this?  I assume not but figured I’d inquire.

Submitted by Alan - IRA critic on Tue, 2016-07-05 23:30

There is no preference to opening an new IRA account to receive the transfer from the inherited account vs. transferring into an existing account when it comes to RMD management. As you indicated, there might be other reasons to have two owned IRA accounts such as different beneficiaries who do not coordinate well, of if one owned IRA is an annuity IRA and the other is not.

Submitted by Jason Hochstadt on Wed, 2016-07-06 15:02

Hi Alan,  Thanks for the confirmation.  Last thing on this:  Previously in our above dialogue you referenced Option 2 being able to be used based upon Regs. (where deceased spouse’s IRA may be transferred into remaining spouse’s IRA – the latter of which takes the former’s outstanding RMDs for 2016).  Do you know which Reg. permits/addresses this?

Submitted by Alan - IRA critic on Wed, 2016-07-06 20:18

  • No single Reg directly addresses this, but a combination of several different Regulations results in a transfer being done to an owned IRA. The Regs do clearly state that the beneficiary is responsible for completing the year of death RMD, but once the beneficiary IRA is closed, there is no way to restore any of this money back to the inherited IRA in order to complete the RMD. A transfer is not a distribution, so the funds that irrevocably are moved to an owned IRA means that the beneficiary must complete the RMD from the owned IRA since the inherited IRA is history.
  • Inherited IRAs from the same decedent and owned IRAs are both subject to aggregation rules for RMDs. That means that even though the custodian knows that the RMD for that particular IRA has not been completed, the custodian has no way of knowing that the RMD was not completed from another IRA before death. Unlike employer plans, the IRA custodian cannot refuse to do a transfer. An owned IRA is also produced by default as explained earlier if a sole spouse beneficiary fails to take a beneficiary RMD.
  • The IRS has consistently allowed the year of death RMD to be completed by the beneficiary from funds in the beneficiary’s own IRA, perhaps because there is no other choice if the beneficiary IRA no longer exists.
  • In summary, the Regs state the beneficiary is responsible but this is being interpreted by the IRS to continue even after the beneficiary IRA has been closed. It is easier to simply take that RMD before the transfer, but if the transfer has been done, there is no real downside since the RMD can be completed and must be completed from any IRA account owned by the beneficiary.

Submitted by Jason Hochstadt on Fri, 2016-07-15 13:46

Hi Alan, As a follow-up to the above when you wrote that, “During the year of death the RMD for that year is always the decedent’s RMD…”  Having reviewed page 8 of the 2015 IRS Pub. 590-B under “IRA Beneficiaries,” “Surviving Spouse,” it says that, “If you are the surviving spouse who is the sole beneficiary of your deceased spouse’s IRA (I assume this means sole primary beneficiary), you may be elected to be treated as the owner and not as the beneficiary.  If you elect to be treated as the owner, you determine the required minimum distribution (if any) as if you were the owner beginning with the year you elect or are deemed to be the owner.”  Doesn’t this conflict with what you wrote in that the remaining spouse in this case, if they become the owner of the deceased spouse’s IRA in 2016 (both are over RMD age), even though the deceased spouse’s 2016 RMD was set, whether it gets fully taken prior to transfer to the remaining spouse’s IRA or not, based on the IRS language if the remaining spouse takes ownership of the IRA in 2016 would the 2016 RMD need to be recalculated and whatever remains outstanding would need to be taken based upon the husband’s Uniform Lifetime Table?  Sorry for the confusion – I understand what you wrote and assumed that to be the case but the IRS language appears different in this regard.  Thank you!

Submitted by Jason Hochstadt on Fri, 2016-07-15 13:48

Hi Alan, The very next paragraph in says, “Note.  If you become the owner in the year your deceased spouse died, do not determine the RMD for that year using your life; rather, you must take the deceased owner’s RMD for that year (to the extent it was not already distributed to the owner before his or her death).”  Too bad I didn’t read that before posting this.  My apologies; thanks again!

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