Separate accounts with a pecuniary bequest

Submitted by Pamela Fedowich on Wed, 2022-12-14 19:36

IRA accountholder has 5 beneficiaries- one spouse (with a pecuniary bequest) of 250,000, and the remainder to be equally split between 4 children. I see a lot of discussion out there about how a pecuniary bequest isn’t eligible for separate account purposes. I don’t see a cite or precedent for this. I posted today, in response to a post from 2018 about this. Two PLRs I found (from Bruce Steiner’s article) allow a spousal bypass and rollover through a trust of a pecuniary bequest. Thoughts?

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Permalink Submitted by David Mertz on Wed, 2022-12-14 21:35

To be eligible for separate-account treatment, CFR 1.401(a)(9)-8 Q&A-3 requires that the separate portions must share pro rata in the gains or losses after the death of the owner. This is typically not the case with a pecuniary interest.
Separate accounting is not necessary for a spouse beneficiary to be able to roll over a distribution to the spouse’s own IRA.

Permalink Submitted by Alan - IRA critic on Thu, 2022-12-15 02:03

Seems like retirement plan pecuniary bequests are highly problematic in different ways and should be avoided if possible. If they eliminate separate account treatment for RMD purposes (but not for other purposes), and could accelerate income with trust or estate beneficiaries, probably more risk than reward.
Had hoped that the Secure Act proposed Regs would provide more clarity on separate accounts, but have not found any. If anything, there are some new issues involving multiple beneficiaries including designated and EDBs.

Permalink Submitted by Pamela Fedowich on Fri, 2022-12-16 16:31

What about if I changed the word “pecuniary” to merely “dollar amount”. The IRA accountholder left the surviving spouse a dollar amount of $250,000, and the four kids the residuary. I think the word “pecuniary” muddies the waters. Why wouldn’t the spouse and her flat dollar amoutn be entitled to the separate accounting rule? Thoughts would be really great!

Permalink Submitted by Alan - IRA critic on Fri, 2022-12-16 20:33

A dollar amount IS a pecuniary bequest, so would trigger the same separate account issues. Are these beneficiaries named directly or is a trust the named beneficiary? Trust beneficiaries are not eligible for separate account treatment regardless of pecuniary issues.

Permalink Submitted by Pamela Fedowich on Tue, 2022-12-20 21:10

Hi, and thank you for your response. No, a trust is not involved. The spouse and 4 kids are direct beneficiaries of the IRA. I just am having trouble finding any PLRs that address this issue. I don’t see why pro-rata or a dollar amount should make a difference. I was interpreting the regulation to mean that everyone needs to take pro-rata in a “reasonable” manner to avoid market fluctuation- meaning one can’t take 30 % today and another beneficiary take 30% next month, when the pro-rata amount can be different- depending on gains or losses. I also think it depends on how the beneficiary designation is worded, as has been discussed, but again, I don’t see a PLR out there that addresses it.

Permalink Submitted by David Mertz on Tue, 2022-12-20 21:35

A pecuniary interest is, by definition, a fixed dollar amount that does not share in any investment gain or loss and the inherited IRA would not be eligible for separate account treatment. A pecuniary interest is not a pro-rata interest.

Permalink Submitted by Alan - IRA critic on Wed, 2022-12-21 01:43

The net effect of this appears to be that the kids can have their separate inherited IRA accounts, but not for RMD purposes. RMDs for all would need to be calculated using the oldest beneficiary including the surviving spouse, as is the case for trust beneficiaries. That said, the spouse could still do the spousal rollover and further reduce her future RMDs. For the kids, this would also have no effect unless account owner passed after their RBD and annual LE RMDs were therefore required in years 1-9. Those annual RMDs would be higher than if a pecuniary amount had not been left that eliminated separate account rules for RMD purposes.