Minor Child as Eligible Designated Beneficiary

Submitted by Randall Vaughan on Thu, 2020-01-16 17:07

I think I understand that spouses, the disabled, and chronically persons who inherit an IRA continue to have “stretch rights” and use their life expectancies if the IRA owner dies in 2020 and the beneficiary was in that eligible position on the date of the owner’s death.

What also seems to be the law but is somewhat uncertain in my mind involves a minor child of the account owner. Is it correct that a minor child who inherits an IRA of a parent who dies in 2020 must begin taking annual RMDs based upon the child’s life expectancy until reaching majority (depending upon the state and other possible bases for extending majority), and upon reaching that magic age, then has 10 years to take the remainder in any amounts in any year or years over that 10-year period as long as full withdrawal occurs before the end of 10 years. In other words, it is correct that the minor child is not entitled to simply defer all distributions during minority and then upon reaching majority, becomes a mere designated beneficiary subject to the 10-year rule.



Submitted by Alan - IRA critic on Thu, 2020-01-16 17:25

Yes, you are correct. The child must take annual RMDs as a minor (may trigger kiddie tax), these cease at majority, and 10 year rule kicks in with no annual RMD requirement. This is complex enought as it is, but could be worse if there are multiple beneficiaries. In that case, those beneficiaries should be sure to create separate inherited IRA accounts by the deadline so the RMD requirements can be addressed individually.  You are also correct that the state age of majority might be extended if the child remains in a secondary education program up to age 26, however more detail and IRS guidance is needed on that issue. 

Submitted by John Peterson on Fri, 2020-01-17 17:10

Is there a chart listing the age of majority in each state?Do you use the state where the decedent died or where the child resides?What if the child moves to a different state with a different age of majority? 

Submitted by Alan - IRA critic on Fri, 2020-01-17 17:41

The age of majority for most states is 18, however there is a somewhat vague extension allowed up to age 26 if the student is pursuing higher education. The basic majority age applies where the child lives, but once the 10 year rule kicks in it is permanent, so I assume if the child drops out of a higher education program, the 10 year rule will irrevocably be triggered. 

Submitted by BruceM on Sat, 2020-01-18 16:12

jmpetersonhere is a list of the age of majority by state https://www.liveabout.com/age-of-majority-chart-2300968Alanfine point: wouldn’t the extended age of majority for a full time student be up to age 23? BruceM

Submitted by Alan - IRA critic on Sat, 2020-01-18 16:36

  • Bruce, not necessarily. From Natalie Choate’s recent Secure Article copied below, this is a very gray area:
  • ” The exception ceases to apply once the child “reaches majority (within the meaning of subparagraph [§ 401(a)(9)] (F).” § 401(a)(9)(F) is an otherwise unrelated provision that deals with payments made to a minor child being treated as paid to the surviving spouse for some obscure statutory purpose not otherwise relevant to estate planners; SECURE is apparently just borrowing a definition from this unrelated section. Presumably the child reaches majority when he or she attains the age of majority applicable in his or her state (typically 18 or 21), unless the following regulatory exception (under § 401(a)(9)(F)) applies: “… a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26. In addition, a child who is disabled within the meaning of section 72(m)(7) when the child reaches the age of majority may be treated as having not reached the age of majority so long as the child continues to be disabled.” Reg. § 1.401(a)(9)-6, A-15. The author has been unable to find anyone who has any experience with what this regulatory definition means, so the topic is not covered in this Outline.”

Submitted by Bruce Steiner on Sat, 2020-01-18 18:20

  • We don’t know what a “specified course of education” means.  What if a child takes a gap year between high school and college, or works for two years between college and an MBA program, or joins the military for two years between high school and college.
  • My guess is that children will get the benefit of the doubt, since the age 26 cap limits the potential for abuse.
  • Fortunately not very many IRA owners die leaving their IRAs to children under age 26.
  • If you leave your IRA to a child, or to a conduit trust for a child, the child will receive the entire IRA by no later than age 36.  It might make more sense to leave the IRA to a discretionary trust for the child.  Even though the trust will have to take all of the IRA benefits within 10 yers, the trustees will be able to retain the proceeds in the trust, thus keeping the money out of the child’s estate for estate tax purposes and keeping it protected against the child’s creditors and spouses.
  • Bruce Steiner

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