Which IRA Payout Rule Applies at Death?
A 92 yr old passed away in Oct 2021. He had an $800,000 Traditional IRA. His 2021 RMD has already been withdrawn. The primary beneficiary is his estate. His will directs all assets to a conduit trust with the surviving spouse (age 74) to receive all income during her lifetime (no specific mention of RMD’s) and remainder beneficiaries are the decedent’s adult children. The IRA is the only asset passing through the will. The intention was for the IRA to be left to the trust to preserve the stretch and in a post-SECURE ACT world, seems the 10-year payout rule would possibly be best case scenario now. However, with the estate as the primary beneficiary, can the 10-year payout rule still apply if IRA still goes to this trust? If not, which IRA payout rule applies? Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2021-10-29 00:04
Unless the trust is named as beneficiary on the IRA, his estate must be treated as the beneficiary. While a conduit trust qualifies for look through with the conduit beneficiary (spouse) being an eligible designated beneficiary, the trust could have received RMDs over her life expectancy and passed them through to her. Unfortuneately, with the estate as beneficiary and death after the RBD, the trust must now take distributions over his very limited remaining life expectancy. With the new 2022 RMD tables, the 2020 divisor will be 3.9, then reduced by 1.0 each year thereafter, and the IRA will be drained in 2025. The trust should have been named as the direct IRA beneficiary.
Permalink Submitted by [email protected] on Fri, 2021-10-29 16:49
A couple additional questions:1) Why does the 5-year payout rule not apply if the estate is the beneficiary?2) With the estate as the beneficiary, how does the custodian transfer the IRA to the trust intact?
Permalink Submitted by Alan - IRA critic on Fri, 2021-10-29 17:53
Estates are only subject to the 5 year rule if the IRA owner passes prior to the required beginning date. When the owner passes on or after the RBD, the remaining life expectancy of the owner determines the RMDs to the estate or to an inherited IRAs assigned out of the estate or out of the trust.
The executor of the will must provide written instructions and copies of the will provisions. Perhaps the IRA custodian will ask for the trust provisions also. The will could be a regular will or pour over will and the trust could be testamentary, created by direction in the will or could be an existing trust. The IRA custodian will also need an EIN for the trust to report distributions on the 1099R. This particular custodian should have procedures in place to generally replicate this post.