Inherited IRA: Calculating RMD’s when originated from a trust

Submitted by Celine Pastore on Thu, 2016-12-08 21:56

I have a client who transferred his inherited IRA to us this year. He is 61 years old (born March 1955) and inherited (in 2014) his father’s IRA (born Jan 1922 and died March 2006), along with his older sister (born July 1949). His recollection was that the IRA was in a trust and left to his mother (in 2006 upon fathers death). When his mother passed (2014) she left it to her two children. It seems that the trust was liquidated and the money was split between the two children to create their own inherited IRA’s. There is no way for me to know when or how this was done or by any certain date/deadline. According to the last custodians statements, it was titled to my client (I don’t manage his sisters money) as BENE, with the fathers name as DECD. No mention of a trust or the mother anyplace. They also note on the statement that his RMD’s were to be based on his life expectancy (24.3 factor in 2015). His accountant on the other hand has been calculating his RMD’s based on the older sisters DOB because he “heard” it originated from a trust. I have no documentation to prove how it was setup one way or the other or how the IRS thinks the RMD’s should be calculated. Is there documentation that gets submitted to the IRS so they know which method/life you are initially using? How do they even know if you took your RMD’s or how much they were supposed to be? The CPA is telling me that can’t and they don’t which I find difficult to believe. The CPA is also saying to just take out the most amount (based on the sister’s age) so there is no chance of it not being enough (to avoid penalty). I’m concerned he will spend down his money too quickly, and I believe that’s poor advice from a CPA. The client also also has an annuity that may say taking the higher RMD amt will trigger a partial surrender charge unless he can prove he needs to use his sisters age for his RMD’s. You can see it’s complicated. I also can’t locate an RMD factor chart that starts before age 70. Do you have one to refer to ? Any help would be appreciated.



Submitted by Alan - IRA critic on Fri, 2016-12-09 01:32

  • The RMD determination for this IRA needs to start from the beginning, and any incorrect guess will change things. Seems like the client must have some access to the executor or his mother’s tax returns which should include the 1099R forms for the last few years. The 1099R for the IRA distribution (RMD or otherwise) will show either her name or the name and tax ID of the trust. The attorney who drafted the trust should still have a copy of it and might also know if the trust might have been terminated or allowed to terminate. If no valid data can be unearthed, client would have to assume that RMDs were being made to the trust based on the age of the oldest trust beneficiary including remainder beneficiaries. If the oldest was mother, RMDs would have started in 2007 using mother’s Table I life expectancy and her age as of 12/31/2007. That divisor would be reduced by 1.0 each year and therefore would be 9.0 less in 2016. That schedule would continue to apply after her death and client and his sister do NOT get a new stretch because they are successor beneficiaries. The only way they would be designated beneficiaries would be if Mom was able to do a spousal rollover while alive and there is little indication that this occurred. There might be a very few years left before the IRA is drained.
  • If the inherited account is an IRA annuity, the insurance company should be able to help confirm some of these past questions. Since IRA annuities have some complex RMD valuation rules, the insurance company had to be involved throughout this period.

Submitted by Celine Pastore on Fri, 2016-12-09 23:20

Wow, that’s scary. Thanks so much for the information. You would think that when the initial transfer was made when the mom died that the custodian would have known that and titled the paperwork accordingly. If the RMD is based on the mom’s age, would I be correct in saying that if the RMD factor on the mom at age 81 in 2007 when she passed was a divisor of 17.9, you then simply deduct 1 from that number each year and that is the total RMD for the new year? If the RMD is based on the older sister, do you simply go by the current age of the sister and then subtract 1 from that number to calculate the current RMD?Thanks again.

Submitted by Alan - IRA critic on Sat, 2016-12-10 01:20

  • IF Mom’s trust was the beneficiary, there are technical rules to determine if the trust is “qualified” for look through treatment. While most trusts are qualified, there is a deadline to notify the custodian of trust details after the owner’s death. That deadline is 10/31 of the year following client’s father’s death. 
  • If the notification deadline is missed the trust is not qualified, and RMDs from that point on must be based on father’s remaining life expectancy. That would be 7.1 years starting in 2007 so if that were the case the IRA would have had to be drained by the end of 2014.
  • But if the trust were qualified (IRA custodian should had made that determination in 2007) AND if mother was the sole beneficiary of the trust (no contingent beneficiares), then mother’s age would be used for RMD calculation. Mom was 81 in 2007 and her initial divisor would be 9.7 for 2007 and as sole trust beneficiary she can recalculate her RMD from the table each year and 2014 final RMD would have a divisor of 6.3. Due to her death in 2014, divisor reductions of 1.0 would apply starting in 2015, so 2015 divisor would be 5.3, then 4.3 for 2016 etc. Again, these divisors apply after her death and do not change for her successor beneficiaries or for RMDs paid to the trust as long as the trust remained beneficiary. In other words, if the trustee dissolved the trust at some point, that will not change the RMD to the beneficiaries who were assigned what remains of the IRA.
  • The 17.9 divisor you mentioned for 2007 would only apply if Mom was able to roll over the IRA to her own name if left to her, or if the trust was terminated by the end of 2007. But there are no indications that this happened by that date. The divisors I indicated are based on the trust remaining as beneficiary through 2007 whether qualified or not qualified. But it will take some detective work to determine what happened to the trust and when. The 1099R forms in the tax records for Mom or from the trust would indicate what tax ID the distributions were made to.
  • If due to some unknown events, Mom did OWN the IRA when she passed, and if separate inherited IRA accounts for the children were created by 12/31/2015, then each child could use their own life expectancy based on their ages in 2015, get the divisor from Table I and reduce it by 1.0 each year.
  • Calling the attorney who drafted the trust might be faster, as attorneys usually keep client records for some time and the attorney might well have been involved in the termination of the trust or at least know whether the original trust allowed the trustee to terminate it. Even so it usually take an IRS PLR to allow a rollover to a sole surviving spouse trust beneficiary.  

Submitted by Celine Pastore on Tue, 2016-12-13 21:19

Client is now finding out that the mom was never the beneficiary of this trust, just the trustee so the kids inherited it. The dad passed in 2006, although I can’t figure out why the kids didn’t receive their own IRA’s until 2014 when the mom passed (unless she was taking RMD’s for the trust and trust stated they couldn’t get the money until she was gone?) Problem is I’m still trying to figure out how to determine the RMD’s. From my understanding I would use the single life table, age of the older sister (born 1949) the year after the dad died in 2006 (which would be age 58 and factor of 27 and then deduct 1.0 for each year since, meaning a factor for 2016 of 18 and 17 for 2017?  Is that correct? When I call the custodians they give me totally different answers (such as current sisters age minus 1 which would be 18.4) or they just want to use the younger clients age factor minus 1.0. Any help would be appreciated. Thanks. 

Submitted by Alan - IRA critic on Wed, 2016-12-14 02:04

Cutting through all this detail, are you sure who or what entity was the named beneficiary of the IRA at the time of father’s death?  The 1099R reporting IRA distributions starting in 2007 would be a good indicator. If the trust was indeed the beneficiary, how and when was it terminated? Without knowing these details, it is not possible to know for sure the current status or future RMDs. DId Mom take RMDs as the beneficiary or as the owner?  Again, a 1099R for any year starting in 2007 and ending in 2014 would be a good indicator. It that 1099R was coded 4 in Box 7 is shows she was taking distributions as a beneficiary, not as an owner.

Add new comment

Log in or register to post comments