Inheriting a Bene IRA and RMD’s

Submitted by Michael Long on Tue, 2010-04-06 14:23

Hi- I was wondering if I could get feedback on a case I am working on and trying to work through my thought process.

Husband had a TRAD IRA and died 3/2001 (he was 71) when he died
Wife (70) at the time treated Husband’s IRA as a DECD Husband FBO Wife &Wife began taking RMD’s on her life expectancy
Wife just passed 12/2009 at 78.

There are 4 kids who were listed as contingent beneficiaries. They want to split the IRA into 4 and stretch over their life times. The current trust company can not determine if they talked to wife in 01 when took over IRA about what to do when she passes. Current trust company is just the custodian and has told the children they need to keep it as it was titled and take RMD’s off of wife’s life expectancy.

My question is since the wife was the BENE of her husbands IRA (did not assume control or roll into her name) should the new IRA be titled:
DECD Father IRA
FBO Child

and can the RMD’s now be stretched over the childs life expectancy or does this fall under having to be drawn out over the life expectancy of the last surviving spouse?

thanks in advance and let me know if I need to provide additional details or am I missing something.



Submitted by Alan Spross on Tue, 2010-04-06 17:35

First, I hope the children were named as successor beneficiaries by the surviving spouse. If they were contingent beneficiaries of the husband when he passed, their status is eliminated unless the surviving spouse disclaimed, which she obviously did not do.

If the children were indeed successor beneficiaries named by the surviving spouse, their RMDs would have to continue to be based on the non recalculated remaining life expectancy of the surviving spouse because she never assumed ownership. While there was no RMD for 2009, it would be worthwhile to verify that she did indeed take her prior RMDs as beneficiary. If she failed in one of those years, that is a good thing because it means that she assumed ownership by default, and the children could then use their own life expectancies for their RMDs.

If the surviving spouse did indeed remain in beneficiary status rather than owner, the IRA should now be titled, “John Smith, Jr., as beneficiary of Susan Smith, beneficiary of John Smith, Sr”. If the current custodian’s processing system works better showing those names in a different order, that is OK as long as they are all shown. Separate accounts can be created for each child, but their RMD requirement will be the same, using their mother’s remaining life expectancy.

Obviously, the situation would be better had the surviving spouse assumed ownership immediately. Her RMDs would have been lower, and the children would now be using their own individual life expectancies for RMDs.

Submitted by BruceM on Thu, 2010-05-27 03:14

If the IRA owner died prior to the RBD, and the IRA beneficiary elected the 5 year rule, and then died the next year, would the successor beneficiary (as chosen by the first beneficiary) continue the 5 year rule, as though the first beneficiary had not died?

BruceM

Submitted by Alan Spross on Thu, 2010-05-27 04:07

Bruce,
Excellent question. I am not aware of any specific IRS ruling on this. I think the answer depends on the particular IRA agreement provisions. The successor beneficiary would not have the option of changing the election if the first beneficiary made an actual election under the agreement, but most agreements just default to life expectancy even if the first beneficiary makes takes no action or makes no overt election. For example, Vanguard’s agreement states that successor beneficiaries “shall succeed to the rights of the beneficiary.”

However, PLR 2008 11028 posted below might provide an opening for a successor beneficiary to seek their own letter ruling to preserve a stretch if they in fact DO succeed to the rights of the (first) beneficiary. But not if a firm election was made pursuant to the controlling IRA agreement that was binding on the first beneficiary. Also, note that the IRA custodian may provide a statement of the actual RMD required to the beneficiary, but the only document that goes to the IRS is the 5498 showing the prior YE FMV. The IRS therefore depends on the custodian to determine RMD options. If a custodian gets hard headed without justification, a T to T transfer of the account to a new custodian might work for the successor beneficiary if there is no firm election on record.

http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…

Finally, above comments contemplate a non spouse (first) beneficiary only.

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