Successor Inherited IRA

Submitted by Mark Bachman on Tue, 2019-07-02 21:14

Is the following a Successor Inherited IRA requiring RMDs to be calculated on the original beneficiary life expectancy instead of the current beneficiary?

An 80 year old man died and his 80 year old wife was the only primary beneficiary on his IRA. There were no contingent beneficiaries. She fell ill soon after his death and was in and out of the hospital until she died 4 months later. She was unable to complete any paperwork to rollover or transfer to her own IRA prior to passing. The IRA custodian distributes the money to “default” beneficiaries since there is no living beneficiary. The default provisions are as follows: 1st to spouse and then to children. Since the spouse is now deceased the money is distributed in Successor Inherited accounts to the children. One of the beneficiary CPAs is claiming this is not a successor beneficiary IRA and therefore RMD will be calculated based on the child’s life expectance. He is claiming that since the wife was less than 10 years different in age we can consider that the account was her own IRA even though paperwork was never completed to make it her own account. What do you believe is correct? Successor Inherited or just inherited?



Submitted by David Mertz on Tue, 2019-07-02 23:32

The CPA is incorrect.  The special rule that automatically makes the wife the owner would only apply if the husband in this case had died before his required beginning date for RMDs, and he died a good number of years after that date.  The children are successor beneficiaries to the wife unless the estate of the wife was able to make a timely qualified disclaimer of the inheritance on behalf of the wife and allow the children to be beneficiaries of the husband under the IRA’s default rules, resulting in the children inheriting directly from the husband.  As successor beneficiaries the children must continue the distribution schedule that would have been required of the wife as beneficiary had she lived.

Submitted by Alan - IRA critic on Wed, 2019-07-03 00:18

DMx, despite the titling and paragraph arrangment in Pub 590B,  IRS Reg 1.408-8, Q 5 b) does not condition the deemed election of ownership on whether the deceased spouse passed before or after the RBD. The deemed election is stated to occur if the surviving spouse does not distribute the amount required as a beneficiary RMD by the deadline for that distribution, which is 12/31 of the year following the year of death (or year the decedent would have reached 70.5 if later). If so, the CPA is correct, although any 10 year age difference between the spouses is not material to the deemed election. That would mean that in some cases a surviving spouse could be deemed owner even when under 59.5.

Submitted by David Mertz on Wed, 2019-07-03 01:12

  • The statement in Pub 590-B appears to derive from section 401(a)(9)(B)(iv) which is qualified with a reference to subparagraph (iii) which appears to apply only if the husband died prior to his RBD, so I think that Pub 590-B is accurate in limiting the special rules to cases where the participant dies before RBD.  I think that this is separate from the interpretation of CFR 1.408-8, Q&A-5.
  • I don’t see how CFR 1.408-8 Q&A-5 applies to the situation described here.  With the wife dying only 4 months after her husband, it seems to me that, as of the date of her death, the wife did not fail to take a distribution as beneficiary before the deadline for doing so and did not trigger deemed ownership (even though, because she died, she wouldn’t be able to take that distribution by the time the deadline arrives).

Submitted by Alan - IRA critic on Wed, 2019-07-03 02:53

  • 1.408-8 is intended to override the basic RMD Regs in 401(a)(9)(B) since only an IRA surviving spouse can elect or be deemed the owner. 1.408-8, Q 5 (a, b, and c) does not limit the elections based on the DOD of the deceased owner. As for the surviving spouse not taking the beneficiary RMD before the required date, that can be due to death of the surviving spouse as well as a failure to meet the deadline if living. This obviously protects eventual beneficiaries if the surviving spouse passes soon after the owner spouse.
  • With respect to 590B, on p 5 “What if you inherit an IRA?” the “treating it as your own” includes both active election and deemed default of beneficiary RMDs.

Submitted by David Mertz on Wed, 2019-07-03 13:17

The IRS ruled in PLR 200945011 that 401(a)(9)(B)(iv)(II) applies to *any* situation where the spouse has not yet been required to take an RMD as beneficiary, not just situations where the participant died before RBD, so that supports your position.  However, this aspect of PLR 200945011 has been debated over the years and it seems that I have inadvertently continued that debate here.  In keeping with the IRS interpretation in PLR 200945011, it seems that the IRA here is deemed to be owned by the wife so the children get to use their own ages to determine RMDs.

Submitted by Mark Bachman on Wed, 2019-07-03 14:42

Thank you for your comments–very helpful!

Submitted by Bruce Steiner on Thu, 2019-07-04 21:44

  • Have W’s executors disclaim within 9 months of H’s death.  Then the children will get the stretch over their life expectancies.
  • Note that in some states this will need court approval, so allow sufficient time.
  • Bruce Steiner

Submitted by Alan - IRA critic on Fri, 2019-07-05 00:47

  • OP – the disclaimer suggestion can be used if necessary. But is it necessary in this case?  Did your opening post with respect to the IRA custodian’s default provisions reflect the conclusion of the actual custodian here or was this a hypothetical example? 
  • In other words, IRA owner passed, then surviving spouse passed without having been able to name her own beneficiaries or elect ownership. IRA default provision appears to have been applied treating the surviving spouse as the owner who had not named a beneficiary, allowing the default terms to be applied to the surviving spouse in the same manner as if the owner had not named a beneficiary. Is that right?i

Submitted by Mark Bachman on Fri, 2019-07-05 18:01

yes,correct

Submitted by Alan - IRA critic on Fri, 2019-07-05 18:40

Then the children should get the stretch and be treated as designated beneficiaries without the need for a disclaimer. Had her estate inherited the IRA, then the disclaimer would have been viable.

Submitted by David Mertz on Fri, 2019-07-05 03:24

After reviewing § 401(a)(9) and CFR 1.401(a)(9)-5 Q&A-5, I’m coming around to the idea that the IRS disregards “to 5-year rule” in § 401(a)(9)(B)(iii), reading it as simply saying “Exception for certain amounts payable over the life of beneficiary” and treating (B)(iii) as applying whether the participant died before or after RBD.  This also serves to make the treatment under § 401(a)(9)(B) similar to the treatment of annuities under § 72(s).  Without that interpretation I don’t see how the beneficiary’s life expectancy would ever be permitted to be used for determining RMDs from qualified retirement plans and IRAs if the participant died after RBD.  It seems that it would be inequitable for only a designated beneficiary of a participants dying before RBD to get to stretch RMDs over the beneficiary’s life expectancy.

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