Successor beneficiary

Submitted by Henry Chan on Mon, 2021-07-12 18:44

To all,

We have the following situation and we would like to have input regarding RMD calculation.

The taxpayer’s mother (original owner of IRA) passed away in year 1. The taxpayer’s father inherited the IRA in year 1. Then the taxpayer’s father passed away in year 2. The taxpayer then inherited the IRA in year 2. Both year 1 and year 2 are before 1/1/2020.

It is my understanding that since all deaths took place before 1/1/2020, the new SECURE Act does not apply. Under the old rule, the taxpayer as a successor beneficiary generally is required to calculate RMD based on remaining life expectancy of the original beneficiary which in this case is the taxpayer’s father.

It appears this assume the taxpayer’s father does not make the election to treat the inherited IRA as his own under Regulation 1.408-8 Q&A-5(b). If the taxpayer’s father has made such election, would the taxpayer be able to calculate RMD using his life expectancy (instead of using the taxpayer’s father’s life expectancy)?

Any comment of the above will be appreciated.

Thank you.



Submitted by Alan - IRA critic on Mon, 2021-07-12 20:50

Yes, the taxpayer can be treated as a designated beneficiary rather than a successor beneficiary under the IRS Reg you cited. The surviving spouse could have either assumed ownership by election thereof, or required ownership by default from failing to take a beneficiary RMD. In this case, the surviving spouse passed too soon to have acquired ownership by default. 
But there is another path for the taxpayer to be treated as the designated beneficiary. This requires mother to have passed prior to her RMD. In that situation father’s first beneficiary RMD would be due by 12/31 of the year following her death, but father did not survive to that date and therefore his beneficiary RMDs never began. In such as case father would be treated as the owner, and taxpayer could then be treated as a designated beneficiary and could use his own LE. Again, mother would have had to pass prior to her RBD for this to apply. Ref Reg 1.401(a)(9)-3, QA 5 and Pub 590 B p 10.

Submitted by Henry Chan on Mon, 2021-07-12 21:41

Thank you for the response.  Just to be clear, unless the special sittuations you described apply, generally the taxpayer in my fact pattern would be considered a succesor benficiary and as a result cannot use his own life expectancy to calculate RMD.  Is my undertanding generally correct?

Submitted by Alan - IRA critic on Mon, 2021-07-12 21:58

Yes, that is correct. Of course, there are several changes under the Secure Act for deaths after 2019.

Submitted by Henry Chan on Wed, 2021-07-14 22:58

Thank you again for your input.  I would like to go back to the issue of required ownership by default.  The relevant pattern is acutally a little different and for the purposes of our discussion the mother passes away in early year 1 and the father passed away later in year 1.  Based on your earlier response, it appears the surviving spouse the father would have passed away too soon to have acquired ownership by default.It appears the relevant regulation does not address the issue of passing away too soon directly.  Has IRS issued specific guidance on this issue of passing away too soon? Thank you.  

Submitted by Alan - IRA critic on Thu, 2021-07-15 00:05

Did you read the paragraph on p 10 of Pub 590B, titled “Death of surviving spouse prior to date distributions begin”.  This rule applies whether beneficiary RMDs can be delayed for years because deceased spouse had several years before reaching 72 and surviving spouse passes before beneficiary RMDs were required – OR this also applies if the surviving spouse would have had a beneficiary RMD due the year following the year of death, but also passed prior to 12/31 of that year. The surviving spouse is then treated as the owner with respect to RMD rules for the successor beneficiary. This results in the successor beneficiary being treated as a designated beneficiary, but most successor beneficiaries now are not EDBs, meaning they fall under the 10 year rule.
But in your specific situation with both deaths pre Secure, the successor beneficiary would avoid the 10 year rule, and would get a new LE stretch since the death of the surviving spouse prior to their first required beneficiary RMD means the surviving spouse is treated as the owner, and the beneficiary of the surviving spouse would be treated as a designated beneficiary rather than as a successor beneficiary. Pre Secure, that beneficiary would get a new life expectancy stretch. 
Therefore, the paragraph referred to above certainly appears to qualify as “specific IRS guidance”, although it does not get much financial press attention. 
Before the 10 year rule kicked in, when a child inherited a parent’s IRA upon the death of the second spouse, it was often worthwhile to check back to determine if that surviving spouse either failed to take an RMD as beneficiary OR did not fail to take a beneficiary RMD because the first such RMD was not yet due and still was treated as the owner due to their death before that first RMD date. 
When the surviving spouse defaults to ownership, that can benefit the surviving spouse before their death as well as their own beneficiary after the surviving spouse passes by their own beneficiary escaping successor beneficiary treatment. However, the Secure Act watered down this benefit since most such beneficiaries will not be EDBs and therefore not qualify for LE RMDs. Instead they get just 10 years, whereas prior to Secure they would have received a life expectancy stretch. 

Submitted by Henry Chan on Thu, 2021-07-15 01:56

Thank you for your detailed response.  I may have misread your response regarding default ownership earlier.  In this case the mother has been taking RMD for many years.  She then passed in year 1 and then the father passed in year 1 later.  How does the fact that the mother has been taking RMD for many years before she passed affect the consequences discussed above?  

Submitted by Alan - IRA critic on Thu, 2021-07-15 04:04

A major effect. Since she died AFTER her RBD, there is no provision for father to be treated as the owner unless either elects to be treated as the owner or FAILS to take his beneficiary RMD. Therefore, if father passes before his first beneficiary RMD is due (12/31 of the year following year of mother’s death) he will NOT be treated as the owner. He either has to assume ownership or fail to take a beneficiary RMD. It is generally believed that father would not be treated as failing to take a beneficiary RMD if he passes before that RMD is even due. Further, the specific wording referred to earlier on p 10 of Pub 590B clearly only applies if mother had passed prior to her RBD.  It does not make sense that the IRS would make the statement on p 10 only for deaths prior to RBD, and not make it for deaths after the RBD unless their interpretation was that these two situations should be treated differently.  

Submitted by Henry Chan on Thu, 2021-07-15 07:43

Thank you for the update.  I would like to expand on the idea that it is generally believed that father would not be treated as failing to take a beneficiary RMD if he passes before that RMD is even due.  It appears this is not a black and white type of issue so I look at the langauge of the regulation.  To be specific, we may need to answer the question whether “Any amount in the IRA that would be required to be distributed to the surviving spouse as beneficiary under section 401(a)(9)(B) is not distributed within the time period required under section 401(a)(9)(B)”.  To me, the relevant language is whether any required amount is not distributed within the applicable time frame.  Reading this language at least to me it appears it is not a black or white type of issue as it applies to a situation the surviving spouse (father) passes before that RMD is even due.  PLR 9807029 appears to support the idea that even if father passes before RMD is due father may be considered has failed to take a beneficiary RMD and thus can be treated to have acquired ownership by default.  The ruling is based on proposed regulation that is somewhat different from the current regulation.  But similar logic may apply.  If I understand the PLR correctly, in the PLR  “no required distributions were made in 1995, which was the appropriate time period applicable to Individual B under Code section 401(a)(9)(B)” and the relevant taxpayer passed in 1995 before the end of the applicable period which is end of 1995.  To your knowledge are there any other more relevant ruling on the issue?  Any comment would be appreciated.

Submitted by Alan - IRA critic on Thu, 2021-07-15 16:31

You are correct. For surviving spouse deaths after RBD, this question remains subject to interpretation and might explain why no articles specifically address the question since the author has no specific guidelines to cite, only indirect logic. I was unable to pull up the 1998 PLR, but PLRs are only a one off indication anyway.

Submitted by Henry Chan on Thu, 2021-07-15 18:39

If the language of the law is not clear, my understanding is that sometime court will look at intent of the law to guide interpretation.  Do you by any chance know what is the logic/intent of this law relating to acquring ownership by default when there has been failure to take beneficiary RMD?

Submitted by Alan - IRA critic on Thu, 2021-07-15 19:16

Probably just part of the historic trend to benefit surviving spouses. If the surviving spouse failed to take the timely beneficiary RMD, they would be subject to the punitive 50% excess accumulation tax. The deemed spousal ownership is effective in the year of the beneficiary RMD failure, and even if the spouse is RMD age as an owner, use of the Uniform table will typically produce a much lower RMD than a beneficiary RMD with the single life table. I think the additional benefit to the beneficiary of the surviving spouse is mostly incidental to protecting the surviving spouse. The current trend of protecting surviving spouses continues with Secure, but the beneficiary of the surviving spouse under Secure is usually limited to the 10 year rule. 

Submitted by Henry Chan on Thu, 2021-07-15 23:44

Earlier you also mentioned that there are several changes under the Secure Act for deaths after 2019.  One of the changes has to do with the so called “10-year rule” that requires under certain circumstances the entire account be distributed within 10 years after date of death.  Since in my situation, all deaths took place before 1/1/2020, this “10-year rule” should not apply.  Is my understanding correct?

Submitted by Alan - IRA critic on Fri, 2021-07-16 01:01

Correct, but it will apply after the current beneficiary passes if the surviving spouse can be treated as the owner as per prior posts. But if the surviving spouse must be treated as the beneficiary because owner passed after RBD, then the next successor’s distribution period is not clear. They may be subject to the 10 year rule or they may be required to complete the remaining distribution period of the current successor beneficiary. The latter would be my guess, as this is another gray area that may or may not be resolved when the IRS finally gets around to publishing new RMD Regs.

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