Inherited Successor beneficiary for ROTH and Traditional IRA Pre 12-31-2019

Submitted by Tarin Hale on Sat, 2021-04-17 13:17

Original owner of ROTH and Traditional IRS’s (Amy) dies in 2015 naming Bob as beneficiary. Bob dies in 2021 with 250K remaining in each. Bob has three siblings: Charlie, Dawn and Edith as beneficiaries under his will. No spouse, No kids.

Bob names Charlie as beneficiary in the IRA’s and tells him to divide equally among the three, who all survive. Charlie will disclaim 2/3rds of the IRA’s as the IRA beneficiary and 100% of the 2/3rds as beneficiary under the Will.

Charlie (less than 10 years younger than Bob) gets life-time RMD for the IRA’s…correct?

Dawn and Edith who will receive the IRA’s through the Estate, they each will have a 5 year RMD as to both IRA’s because the Estate is a non person Entity….correct?

I have a custodian suggesting that the D & E will have a 10 year RMD for the Traditional IRA and 5 for the Roth because the original owner died before 12-31-2019. I don’t see how to get the 10 year RMD.



Submitted by Alan - IRA critic on Sat, 2021-04-17 17:10

Tracing this back, when the designated beneficiary (Bob) passed, the Secure Act indicates that the 10 year rule will apply to his beneficiaries. Charlie is not an EDB because he is a successor beneficiary, not a designated beneficiary of Bob. The estate is also a successor beneficiary and the 10 year rule applies to the estate as well, although the executor of the estate should be able to assign D and E’s share out of the estate to inherited IRAs for D and E. See “Death of a Beneficiary” on p 10 of the current Pub 590-B.
Last month the IRS blindsided everyone by stating in the current edition of Pub 590 B that even within the 10 year rule there are annual RMDs required until the last year when the entire balance must be distributed. 
The last paragraph of the “10 year rule” on p 10 of the Pub is sure to cause confusion. Bob was not an EDB, because Amy passed prior to the Secure Act, but the Secure Act states that a DB such as Bob is treated as an EDB upon his death after the Secure Act. Following is a copy of that paragraph and also the 10 year rule explanation in Pub 590-B.
“(5) EXCEPTION FOR CERTAIN BENEFICIARIES.—(A) IN GENERAL.—If an employee dies before the effective date, then, in applying the amendments made by this subsection to such employee’s designated beneficiary who dies after such date—(i) such amendments shall apply to any beneficiary of such designated beneficiary; and(ii) the designated beneficiary shall be treated as an eligible designated beneficiary for purposes of applying section 401(a)(9)(H)(ii) of the Internal Revenue Code of 1986 (as in effect after such amendments).
“The 10-year rule also applies upon the death of an eligible designated beneficiary or upon a minor child beneficiary reaching the age of majority except that the 10-year period ends on the 10th anniversary of the beneficiary’s death or the child’s attainment of majority. ”
As it turns out, we have a Rubic’s cube situation here. Pub 590 B has no specific guidance on estates as successor beneficiaries, so I am assuming that the estate will be treated just like Charlie, subject to the 10 year rule. However, given the IRS’ stated (but quite possibly to be corrected) position that within the 10 year rule there are annual RMDs, given the estate as a successor beneficiary, I have no idea how those annual RMDs within the 10 year rule would be determined.
In this situation, ask 10 people how this is handled including the IRS, you’ll get a different opinions on a couple of these issues. But note that an IRA custodian has no authority to force out any particular annual distribution…………

Submitted by Tarin Hale on Sun, 2021-04-18 12:47

Thank you very much for the opinion and the references. However, in looking at Pub 590-B as you cited, I don’t see how to avoid the 5 year rule which states:  “The 5-year rule generally applies to all beneficiaries if the owner died in a year ending before 2020, and to beneficiaries who are not individuals if the owner died in a year ending after 2019. For beneficiaries who are individuals, see 10-year rule, next.”  How are the beneficiaries not subject to the 5 year rule as stated here? Secondly, I could not find the citation you provided “(5) EXCEPTION FOR CERTAIN BENEFICIARIES…” Where is this from, please?Thank you.

Submitted by Alan - IRA critic on Sun, 2021-04-18 15:56

The citation comes from the Secure Act, Sec 401(a)(5)(A), link below.
Text – H.R.1994 – 116th Congress (2019-2020): Setting Every Community Up for Retirement Enhancement Act of 2019 | Congress.gov | Library of Congress
The 5 year rule has and continues to apply only if the owner passes prior to RBD, and then only if the designated beneficiary elects it, or if the original beneficiary is not an individual. Almost all IRA agreements are written to default to the life expectancy method for individuals. An estate beneficiary (of the owner, not the beneficiary) is subject to mandatory 5 year rule as before. This did not change. In this case the estate is that of Bob, the designated beneficiary. Part of the quote in the 4th bullet point above, it states “such amendment will apply to any beneficiary of the designated beneficiary”, and that includes estates, trusts, etc.
Having 10 years is certainly better than only having 5 to drain the inherited IRA. 
Main point being that even if Amy passed prior to RBD, Bob did not elect the 5 year rule, he used the LE exception which is the default method in IRA agreements. When Bob passes, his beneficiaries (individuals or his estate) are not treated as if they inherited from the owner, but rather they inherited from a beneficiary and are all successor beneficiaries. Only problem I see here is that if the estate falls under the 10 year rule like Charlie, and if the IRS persists in requiring annual LE RMDs within the 10 year rule, there is no way to calculate LE of an estate because it has none. 

Submitted by Tarin Hale on Sun, 2021-04-18 20:07

Again, very helpful. Thank you. And FYI –  Amy did not reach RMD for the IRA’s.   And now I have the next round – BOB died with his own Traditional and Roth IRA,s (not inherited) before RMD.  Named Charlie Beneficiary under the IRA’s and Exectutor, under the Will – C,D &E are equal beneficiaries under the Will.   Charlie will disclaim 2/3rd interests in IRA’s as beneficiary and as beneficiary under the Will. 2/3rds then go to BOB’s Estate. Estate then delivers 1/3rd each to Dawn and Edith.   Now, in this case  I believe the Estate is a beneficiary of the IRA’s from the owner  and therefore, as an entity, is subject to the 5 year rule, which is then passed to Dawn and Edith for each of their 1/3rd share… Correct?  

Submitted by Alan - IRA critic on Sun, 2021-04-18 22:34

Agree, the 5 year rule applies including for Charlie, and even if Charlie established a separate inherited IRA by the deadline.

Submitted by Tarin Hale on Sun, 2021-04-18 23:46

My understanding is that Charlie will keep his status as direct beneficiary (less than 10 years younger) as he is disclaiming before it goes to the Estate, and therefore can opt for a lifetime RMD… Correct?

Submitted by Alan - IRA critic on Mon, 2021-04-19 01:48

I don’t think so. The following IRS Reg addresses the effect of having non individual beneficiaries (estate):
Reg 1.401(a)(9) – 4 Q-3. “May a person other than an individual be considered to be a designated beneficiary for purposes of section 401(a)(9)?A-3. No, only individuals may be designated beneficiaries for purposes of section 401(a)(9). A person that is not an individual, such as the employee‘s estate, may not be a designated beneficiary. If a person other than an individual is designated as a beneficiary of an employee‘s benefit, the employee will be treated as having no designated beneficiary for purposes of section 401(a)(9), even if there are also individuals designated as beneficiaries. However, see A-5 of this section for special rules that apply to trusts and A-2 and A-3 of § 1.401(a)(9)-8 for rules that apply to separate accounts.”         While the above refers to using the separate account rules to separate an individual beneficiary from other such beneficiaries to determine the LE factor, it appear that such rules also do not apply if there are non individual beneficiaries. The Secure Act did little to address various multi beneficiary situations. Attempting to use the separate account rules when other beneficiaries include an estate are quite aggressive and do not appear to apply. 

Submitted by Tarin Hale on Mon, 2021-04-19 20:10

 Having Difficulty Following you here…           Where a Designated beneficiary disclaims a portion of the IRA’s, and there is no contingent beneficiary, the balance of the funds go to the Owner’s Estate for distribution under the Will.  I do not see how the Estate is a “designated beneficiary” that would apply in your analysis which would have any impact on Charlie taking the 1/3rd portion as the only “designated beneficiary.”  The owner never designated his Estate or any other non-individual.       I offer in support a section of the Statute which referrers to “any portion of the employee’s interest is payable to a designated beneficiary.”.    “26 USC Sect.401(a)(9)(B)(iii) (iii)Exception to 5-year rule for certain amounts payable over life of beneficiary.—If— (I) any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary, (II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), and (III) such distributions begin not later than 1 year after the date of the employee’s death or such later date as the Secretary may by regulations prescribe,  for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.”         Your thoughts would be greatly appreciated. I confess that I have no experience in this area whatsoever… Just trying to help a family member and trying to find the right answer… or expert.

Submitted by Alan - IRA critic on Mon, 2021-04-19 21:38

The code Section you quoted above includes (“in accordance with regulations”), and the Reg I copied earlier is one of those regulations that interprets the code. The basic issue is that the tax code itself seems to assume that each account only has one beneficiary, and that creates a need for the IRS to write regulations to address multiple beneficiary situations. In addtion, there is a useage issue with the term “Designated beneficiary”. All individuals are designated beneficiaries, but only one is a designated beneficiary for determining the RMD divisor. 
It common to have an estate or trust beneficiary and common to have multiple individual beneficiaries, but rare to have an estate along with an individual. Of course, this has been created by Charlie’s partial disclaimer”. This situation is addressed directly with the portion of the Reg I quoted earlier which states “If a person other than an individual is designated as a beneficiary of an employee‘s benefit, the employee will be treated as having no designated beneficiary for purposes of section 401(a)(9), even if there are also individuals designated as beneficiaries.” 

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