RMD Not Yet Taken in Year of Death

Submitted by Janette Gut on Wed, 2018-04-25 15:59

Advice from Fideltiy: Since RMD had not been taken out of the IRA before IRA owner’s death, it becomes part of the IRA Trust with the RMD being split between the 6 grandchildren beneficiaries. The tax rate is based on the Trust for this year’s RMD. Fidelity withheld 10% Federal and the Ohio required amount. It was suggested that we ask a CPA what the Trust rate is for a trust and have Fidelity withhold the difference.

After re-reading the ‘Parlay’ book regarding distributions, there seems to be some conflicting information. Ed Slott is saying that the whole RMD should be paid out to the beneficiaries so that they can pay taxes based on their own rates. If left in the Trust, then the Trust will pay at its rate. Could this be an old IRA rule that has since been changed? The book is about 10 years old. How should this year’s RMD be distributed and taxed?



Submitted by Alan - IRA critic on Wed, 2018-04-25 18:27

The trust tax rate will not apply unless the trust is accumulating income and not passing distributions through to the trust beneficiaries. This is a function of the trust provisions and/or the provisions may grant the trustee discretion in making this decision. Another possibllity is that the trustee has the option to terminate the trust and assign the inherited IRA to the trust beneficiaries. If this is done before year end, the year of death RMD does not have to be distributed to the trust, but rather to the trust beneficiaries in any combination. For example, if one beneficiary wants a lump sum distribution, it will be enough to complete the year of death RMD amount, and the others would not have to take a distribution for the year of death. Therefore, there are several possibilities depending on the trust provisions or what the trustee decides to do. Trust rates are high, so taxes due would be reduced if the income was passed through to the trust beneficiaries on a K 1 OR if the trust is terminated and the IRA is assigned ratably to the trust beneficiaries. Coordination of all this can be challenging because 6 different families are involved and possibly kiddie taxes if the grandchildren are minors. There has been no rules changes relative to these issues. Of course Fidelity will find it much simpler on their end to issue one check to the trust and issue a 1099R to the trust EIN. That goes for future years as well when the beneficiary RMDs kick in and the trust qualification for look through is also determined as well as who is the oldest beneficiary of the trust.

Submitted by Janette Gut on Thu, 2018-04-26 00:33

Thank you for your reply.  The information is very helpful and confirms our understanding of the book’s explanation. Each of the beneficiaries have Ed’s book which will make things much easier for the Trustee.FYI: The trust is a conduit/see through trust (not discretionary) with RMD’s to be paid to 6 adult beneficiaries. Trustee is directed to distribute RMD’s annually until there is not enough in the IRA to keep it going. The IRA custodian (Fidelity) will transfer funds to a BDA (Beneficiary Distribution Account) so that the trustee can make distributions to the 6 benefiaries who will pay taxes at their own rates.  The RMD will be based on the oldest beneficiary.  Thankfully there is only about 10 years difference in ages from youngest to oldest. 

Submitted by Nathan Kastner on Thu, 2018-04-26 15:35

I thought that a final RMD had to be taken prior to distribution to the listed IRA beneficiaries (no matter whether they be a trust or individuals). And that final RMD was payable to teh estate of the original IRA owner, and considered income in respect of the decedent??? I can’t quote IRS regs on this one, but I’m “in the biz” and this is typically how the IRS custodians insist that it be handled. Just my personal experience….

Submitted by David Mertz on Thu, 2018-04-26 16:52

When an IRA participant dies after the participant’s required beginning date for RMDs, the IRA beneficiary automatically becomes responsible for receiving and reporting on the beneficiary’s tax return any uncompleted portion of the year-of-death RMD.  Distributions made after the death of the participant are income in respect of the decedent, but are always made to the beneficiary, not to the estate of the deceased (unless the estate is the beneficiary of the IRA either by default due to the participant failing to designate a beneficiary or because the participant explicitly listed the estate as beneficiary).

Submitted by Bruce Steiner on Sun, 2018-04-29 02:25

  • It was poor drafting to require that the IRA distributions be paid out each year.  That throws the IRA distributions into the beneficiaries’ estates for estate tax purposes, and exposes them to the beneficiaries’ creditors and spouses.  If the beneficiaries live to life expectancy, nothing will be left in the trust, and all of the protections of the trust will be lost.
  • It would have been better to give the trustees discretion to distribute some, all or none of the income and principal of the trust.  In that case, the trustees would consider all of the facts and circumstances, including income taxes, in deciding how much, if anything, to distribute each year.
  • Bruce Steiner

Submitted by Janette Gut on Mon, 2018-04-30 12:33

  • Thank you all for taking the time to add your thoughts and concerns on this situation.It was the intention of the decedent not to flood the beneficiaries, his 6 grandchildren, with a lump sum which they would most likely tend to mis-handle. This also gives them the opportunity to stretch the benefits of an IRA by leaving their individual RMD’s in their own retirement accounts.  By naming their own beneficiaries, they can stretch the funds even further. 
  • If the IRA does not pay out the RMD’s to the beneficiaries, the taxes on the RMD’s each year will be paid at the Trust’s rate of 35%, thereby depleting the IRA at a much faster rate. By distributing the RMD to the beneficiaries, the taxes are paid at their own rates. 
  • With the RMD’s now based on the age of the oldest beneficiary, the RMD will be a smaller amount which will then be divided 6 ways.  This will not be a significant hit to each individual’s income.  But it will allow them to take advantage of the “stretch” benefit that Ed Slott talks about.  It remains to be seen if any of the beneficiaries are able and willing to do that.  
  • There is only 1 trustee in this conduit or see through trust, which ensures that the RMD’s be handled according to the wishes of the original IRA owner.

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