The Handling of RMDs for an Estate as Default Beneficiary of a Traditional IRA in 2021
Here’s the scenario:
A Traditional IRA owner currently taking Required Minimum Distributions passes away and either failed to have designated a beneficiary OR the named beneficiary had passed away, per stirpes didn’t apply and the beneficiary designation was never updated before the IRA owner’s death.
Because of this, the IRA beneficiary defaults to the deceased IRA owner’s estate and an Inherited IRA for the benefit of the Estate is required to be established. However, the IRA owner had passed away before taking their RMD for 2021.
In doing some research, IRS Private Letter Ruling 202031007 looks like it allows for the executor of the estate to set up Inherited IRA’s FBO the beneficiaries of the estate (as named in the will of the IRA owner) which will be funded via distributions made from the Inherited IRA FBO the Estate. This may muddy the waters of the now standard RMD rules set forth via the SECURE ACT.
Questions:
Who is responsible for taking the 2021 RMD and thus paying the tax on the distribution: The estate or the estate’s beneficiaries?
By when must the Inherited IRAs of the beneficiaries of the deceased IRA owner’s estate empty the Inherited IRA?
Permalink Submitted by Alan - IRA critic on Fri, 2021-10-22 21:43
Beneficiaries are responsible, which could be either the estate or the individual inherited IRA owners after assignment of the IRA out of the estate to these beneficiaries. The IRS does not care, but an effort should be made to complete the year of death RMD before the end of that year. This RMD is taxable to the beneficiary who receives it. If the individual accounts can be set up fairly quickly it will save the estate from having to take the RMD and then passing the income out to the estate beneficiaries on a K 1. Either way, the beneficiaries are better served to pay the taxes since the tax rates for estate income are high.
The estate or the beneficiaries of the estate must take annual RMDs based on the remaining life expectancy of the deceased owner. The tables will change in 2022. Once the divisor drops below 1.0, the account will be drained. Roughly, this happens in the number of years equal to the first beneficiary year divisor.
Assignment of IRAs by executors or trustees of a trust have been allowed for years, but some custodians resist even though they know it is allowed. Some even ask the beneficiary to get their own PLR. GIven the cost and time to complete a PLR, this is a complete waste of time and money. If the IRA custodian does not cooperate, the account should be transferred to a custodian that will. This may take some work, but it can all be avoided if IRA owners name beneficiaries in the first place.
Permalink Submitted by Michael Wemple on Tue, 2021-10-26 17:01
Thank you, Alan. I just wanted to get a clarification. You stated the RMD for each beneficiary (all beneficiaries in this scenario are non-spouse) will be based upon the Single Life expectancy of the deceased IRA owner. Is this because we are dealing with the beneficiaries of the estate? If these individuals had been named as outright beneficiaries they would need to fully distribute the account within 10 years following the death of the IRA owner.
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 18:32
Yes, the remaining age of decedent applies because the beneficiary is the estate AND owner passed after the RBD. The Secure Act did not change the RMD rules for estates or non qualified trusts. If individual beneficiaries inherited directly (even per stirpes beneficiaries), then the 10 year rule would apply for any beneficiaries who are not eligible designated beneficiaries (eg disabled, not more than 10 years younger etc).
Permalink Submitted by Michael Wemple on Tue, 2021-10-26 20:52
Thanks again for your input, Alan.