RMD Requirements for an Inherited IRA FBO an Estate in 2020

Submitted by Trey Isgrig on Mon, 2020-05-25 11:39

I have a client (Husband), who passed away 2/2020 at age 81 (DOB 8/1938). His primary IRA beneficiary designation was 20% to his spouse (wife), 25% each to three children & 5% to his sibling. The wife passed away 4/2020 at age 75 (DOB 8/1944). The husband’s IRA has not yet been split, but we anticipate doing so this year once the estate planning attorney provides the required documentation, and the 20% beneficial share that was payable to his wife will now be payable to her estate. We plan to establish an Inherited IRA FBO her estate and the beneficiaries of her estate are her three children.

I would like to confirm the RMD option(s) that may be available to her estate and who will be paying the income tax on the distributions from the Inherited IRA FBO her estate:

1) Will the Inherited IRA FBO wife’s estate have required minimum distributions over the husband’s remaining life expectancy or the wife’s remaining life expectancy or be subject to the 10 year required distribution rule as a result of the SECURE Act changes?

2) If we use the husband’s remaining life expectancy, do we use the Uniform Distribution Table and his 2020 end of year age 82 (17.1 years) or his 2021 end of year age 83 (16.3 years)?

3) Or, if we use the wife’s remaining life expectancy, do we use the Uniform Distribution Table and her 2020 end of year age 76 (22.0 years) or her 2021 end of year age 77 (21.2 years) or do we use the Single Life Expectancy Table for Inherited IRAs to determine the remaining life expectancy using her 2020 end of year age 76 (12.7 years) or 2021 end of year age 77 (12.1 years)?

4) I anticipate all distributions from the Inherited IRA FBO of wife’s estate will unfortunately be subject to income tax at estate income tax rates, but is there any way for the distributions to be taxable to the beneficiaries of her estate (three children) instead?

Thanks in advance.



Submitted by Alan - IRA critic on Mon, 2020-05-25 18:19

  1. Wife’s estate or beneficiaries of wife’s estate who receive inherited IRAs assigned by her executor will be subject to the 10 year rule, therefore these inherited IRAs need to be drained by 12/31/2030 but there are no annual beneficiary RMDs due. Basically, the wife was an EDB, but her death triggered the 10 year rule for her estate or if she had named her own beneficiaries directly. There is no year of death RMD for 2020 due to CARES Act blanket RMD waiver.
  2.  Even if the IRS rules that the “longer than” option is still allowed post Secure, his remaining LE was not longer than that of his younger wife, and even if it had been longer, the 10 year rule would have kicked in upon wife’s death.
  3. If wife had not passed, her annual RMD would have been determined from the single life table, although had she lived she likely would have done the spousal rollover to her own IRA. But since she passed, the 10 year rule will now apply per 1. above.
  4. Yes, her executor can assign the estate IRA to the beneficiaries under her will, and this is best done before any distributions are made to the estate. There is time here since the first beneficiary RMD is not due until 12/31/2021. Even if the executor failed to assign the estate inherited IRA, any distributions made to the estate could be passed through on Form K 1 (Form 1041) to the estate beneficiaries and taxes paid at those beneficiary’s personal tax rates.
  5. The 10 year rule does not include 2020, so distributions from the inherited IRA could be spread over 11 tax years. 
  6. The other beneficiaries who inherited outright should create separate inherited IRAs even though subject to the 10 year rule. However, if the sibling is not more than 10 years younger than client, then the sibling is an EDB who can stretch over their LE (same with any child that is disabled). In that case the sibling should be sure to create their separate inherited IRA no later than 12/31/2021.
  7. The Secure Act is not real clear in certain multiple beneficiary situations, so the IRS needs to release Regs that clarify some of this. However, the previous is expected to be confirmed with respect to the wife’s estate interest.

Submitted by Trey Isgrig on Thu, 2020-06-11 02:24

With respect to reply #4. “Yes, her executor can assign the estate IRA to the beneficiaries under her will, and this is best done before any distributions are made to the estate. There is time here since the first beneficiary RMD is not due until 12/31/2021.” Can you please clarify how the executor can assign the estate IRA to the beneficiaries? Does that mean the beneficiaries can still receive the estate Inherited IRA account into their own Inherited IRA accounts? If the custodian states that the estate cannot assign the Inherited IRA to the beneficiaries, is there any resource I can reference to show why this should be allowable? Thanks in advance. 

Submitted by Alan - IRA critic on Thu, 2020-06-11 17:46

  • The IRS has chosen for some reason to only address assignment of retirement accounts out of trusts and estate by issuing PLRs. Custodians know this is legal, but since many prefer not to hold inherited IRA accounts, they act like the IRS may have a problem. It’s just an excuse to leads to the executor having to locate a custodian that will accept assignment and then transfer the IRA to that custodian. This is rarely a problem with major firms such as Schwab, Fidelity, or Vanguard, but smaller custodians and some banks may refuse to cooperate.
  • The following is copied from an article by noted authority Natalie Choate:   “Better yet, the executor, after wrapping up all the matters involved in Bill’s estate, can transfer the IRA, in three pieces, out to inherited IRAs in the names of the respective children, as successor beneficiaries of Bill. That way the estate can be closed, and each child can control his or her own investments and rate of withdrawals. Some IRA providers do not permit such transfers, but many do, and if Bill’s particular IRA provider balks at allowing this transfer, the executor can simply transfer the IRA (still in the name of the estate) to a different IRA provider.”
  • Executor should send a formal letter to the IRA custodian assigning the estate inherited account to the will beneficiaries (include names, address, and SSN). They might include a reference to PLRs 2002-34019 and 2008 50058, where the IRS has authorized this. If the custodian still refuses to cooperate, then the inherited estate IRA may need to be transferred to a cooperating custodian.

Submitted by Trey Isgrig on Thu, 2020-06-11 18:26

Thank you Alan as is this is very  helpful and greatly appreciated. Interestingly, Schwab is the current custodian and initially indicated the estate could not transfer the Inherited IRA to each of the estate beneficiaries. This is really helpful to know this should be allowable. Thanks again. Trey

Submitted by Alan - IRA critic on Thu, 2020-06-11 19:05

  • Surprising from Schwab……..might work to just send them the properly modified version of the following sample letter.
  • 5.2 Fiduciary Letter Transferring Plan Account to BeneficiaryUse either Alt. 1 or Alt. 2, plus either Alt. A or Alt. B.To the Plan Administrator of the [NAME OF RETIREMENT PLAN] (hereinafter “the Plan”): Re: Benefits of [NAME OF DECEASED PARTICIPANT], deceased (hereinafter “the Participant”)[Alt. 1: From executor, if benefits were payable to the participant’s estate]: I am the [FIDUCIARY’S TITLE SUCH AS EXECUTOR, ADMINISTRATOR, OR PERSONAL REPRESENTATIVE] of the estate of the Participant, who was a participant in the Plan. I enclose a certificate evidencing my appointment. In that capacity, I am transferring the Participant’s interest in the Plan to the beneficiary/ies of Participant’s estate who is/are entitled to receive it under [“THE TERMS OF PARTICIPANT’S WILL” or “APPLICABLE INTESTACY LAW”]. [Alt. 2: From trustee of trust named as beneficiary]: I am the Trustee of the [NAME OF TRUST] (“the Trust”) which was the named beneficiary of the Participant under the Plan. In my capacity as such Trustee, I am transferring the Participant’s interest in the Plan to the beneficiary/ies who is/are entitled to receive it under the terms of the Trust.[Alt. A: Transfer to one beneficiary] Accordingly, I hereby instruct and direct you to change the titling of this plan benefit to “[NAME OF BENEFICIARY TO WHOM THE BENEFIT IS BEING TRANSFERRED] as successor beneficiary of [NAME OF DECEASED PARTICIPANT].” The beneficiary’s address and Social Security number are [INSERT].[Alt. B: Transfer to several beneficiaries, in separated accounts] Accordingly, I hereby instruct and direct you to divide the benefit into [NUMBER OF SEPARATED ACCOUNTS TO BE ESTABLISHED] separate accounts of equal value, and to change the titling of each such account to the name of one of the beneficiaries to whom the benefit is being transferred “as successor beneficiary of [NAME OF DECEASED PARTICIPANT].” The names, addresses, and Social Security numbers of the individual beneficiaries of the separated accounts are: [INSERT].In accordance with the instructions for IRS Form 1099-R (page R-3), this transfer is to be treated as a plan-to-plan transfer and is not to be treated or reported as a distribution from the Plan. Please advise what if any further information or documentation you required to complete this transfer.Very truly yours, [SIGNATURE OF EXECUTOR OR TRUSTEE]

Submitted by Trey Isgrig on Fri, 2020-06-12 11:28

Perfect – Thank you so much Alan!

Add new comment

Log in or register to post comments