Multiple Beneficiaries of IRA after RBD
A friend’s parents recently both passed away at 79 and 74. Their three children were named as beneficiary of all of their IRA accounts. The father had three IRA accounts at three separate institutions and the mother had three IRA accounts at three separate institutions (six IRAs total). Neither of the parents had taken their 2010 RMD. All three children would like to move the IRA accounts into their own Inherited IRAs and to different investment firms. I believe I know the steps I would take to handle all of this, but first wanted to make sure I am covering my basis, without over complicating things.
1. Contact each of the six custodians and provide them a copy of the death certificate and any other documentation they require to have each custodian distribute the 2010 RMDs from each IRA. Each IRA custodian will distribute the RMD to each respective beneficiary. For example, if the RMD is $6,000 from IRA #1, then three checks for $2,000 each will be sent to each IRA. This all must be done by 12/31/2010.
2. After the 2010 RMDs have been taken, contact each of the six custodians and provide instructions to split up each IRA into Inherited IRAs for each of the three children. On the titling, each IRA will have the children’s name as beneficiary and the parent name as deceased. There will be a total of 18 Inherited IRAs established (6 IRAs x 3 beneficiaries = 18 IRAs).
3. After each of the Inherited IRAs are established, each child will take out their RMD by 12/31/2011 based on their own life expectancy factor as of their attained age in 2011, and then reduce it by one each year thereafter. Alternatively, AFTER each of the Inherited IRAs are established, each child can combine their three IRAs from the father to one IRA and each child can combine their three IRAs from the mother to a second IRA and then take out the RMD from just those two Inherited IRAs (as long as the Inherited IRA from the mother and father do not get combined). This would allow each child to just have to take one RMD from each IRA instead of three RMDs from each IRA.
4. All transfers must be done via trustee to trustee.
5. All income from the 2010 RMD will be taken by and reported to each child for tax purposes.
6. A review of the deceased parent’s 8606 should be done to ensure no after tax contributions were made to any of the IRAs.
Thank you as usual!
Permalink Submitted by Alan Spross on Tue, 2010-09-14 20:01
Correct analysis. You have described the most basic procedure that minimizes the chance of error and provides consolidation of accounts.
There are deviations from your procedure that would not create problems with the IRS, but some of them are complex and could result in miscommunication or error. Frequently , one child wants a lump sum distribution for various reasons. That child could request a full 1/3 distribution from each of the various IRA accounts. That distribution would satisfy the decedent’s RMDs for 2010 and the others would not have to take any distributions until year end 2011 after creating separate accounts.
Also, separate accounts are often created prior to realizing that the decedent had not taken their RMD. That is OK. But then the beneficiaries have to coordinate with each other to make sure that they collectively satisfy the 2010 RMD.
Final thought – each beneficiary should name their own successor beneficiary ASAP after providing the death Cert to the custodian so that their shares goes to their desired beneficiary should they pass unexpectedly.
Permalink Submitted by Anonymous (not verified) on Tue, 2010-09-14 20:11
At quick glance I agree with everything you write. It will be a monumental task to get everything combined and simplified. I would inquire with each custodian about their willingness and ability to ‘”transfer” and/”hold” Inherited IRAs. I know of many smaller outfits (mainly banks and credit unions) that will be very difficult to deal with.
One thing I noticed is that you seem to indicate that the 2010 Final RMD will come out prior to the transfer into Inherited IRAs – #2 and #3. Most likely the custodians will first split up the accounts and then distribute the RMD from the Inherited IRA. But some will actually distribute the RMD first (a kind of “behind the scenes” transaction) and still use the benes SSN for tax reporting.
pko
Permalink Submitted by Jonathan Sard on Wed, 2010-09-22 17:48
Follow up question. If all benefiaries agreed, could they first consolidate all three of the mother’s IRAs to one Inherited IRA account, and then consolidate all three of the father’s IRAs to one Inherited IRA account, then take the 2010 RMD from the two Inherited IRAs, and then after the RMDs have been distributed, split up each IRA into three Inherited IRAs? This seems a bit easier than my initial recommendation on my initial post. Thoughts? Thank you!
Permalink Submitted by Alan Spross on Wed, 2010-09-22 18:50
Yes, that would work.
While the beneficiaries may agree, you are dealing with different IRA custodians who may have their own thoughts on how to proceed. Therefore, you would want to be sure that the remaining institution(s) understand how you want to proceed. It really does not matter whether the RMDs are taken prior to creation of the separate accounts or after. Doing it prior is recommended if the beneficiaries do not communicate well or are not on the same page since it guarantees that the RMD will in fact be satisfied. But if they all agree and understand, then taking the RMD after separate account creation will also work. The IRS does not really care as long as the RMD is taken by the end of the year of death. And even if it is not, they will waive the penalty since it often takes quite awhile for executors and heirs to determine whether the RMD was satisfied or not. So it is usually easily resolved even if the RMD is late.
As you can see, with all the variables here, there is no one size fits all recommendation to be made. But getting coordination with the beneficiaries is a great first step.
Permalink Submitted by Jonathan Sard on Mon, 2010-10-04 23:29
Yet more follow up questions. The two IRA account holders passed away at the same time and each were the primary beneficiary of each other’s IRA, with their three children named contingent beneficiary of each of the IRAs.
Question 1: Is there a legal clause that states that the contingent beneficiaries are automatically made to be primary since both spouses passes away at the same time? The concern is what happens since the primary beneficiary, who passed away at the same time as the account holder, now was unable to rename an IRA beneficiary? Will the IRS look at this situation as though the primary beneficiary (the other deceased spouse) passed away with no beneficiary and now the three children can’t open Inherited IRAs?
Question 2: Since neither account owner had taken their 2010 RMD prior to their deaths, is there anything that should prohibit the current custodians from distributing the deceased’s RMD for 2010 BEFORE the accounts are retitled to the Inherited IRAs? Basically, should the RMD still be able to come out in 2010 while the accounts are still titled in the deceased account holders name? There seems to be some pushback on this issue from the current custodians.
Thank you!
Permalink Submitted by Alan Spross on Tue, 2010-10-05 01:06
Q 1) In the case of near simultaneous deaths, the order of procedure should be approximately as follows:
1) Consult the IRA beneficiary clause for any customized beneficiary designation, eg provisions containing a survival period for the primary beneficiary(s)
2) Check the IRA agreement for any provisions which address near simultaneous deaths
3) If the above are not in place, check the status of the “Uniform SImultaneous Death Act”, which specifies a 120 hour survival period. If both die within 120 hours, each spouse is deemed to have pre deceased the other, and the contigent beneficiaries receive the funds.
Any of the above could result in the contingent beneficiaries being considered primary beneficiaries. If none of them apply, the exact time of each death must be determined under state law, and the estate of the second to die would inherit the IRA of the first spouse to die since there was insufficient time for the second to die to name successor beneficiaries. The children would directly inherit the IRA of the second spouse to die.
Q2) RMDs or any other distributions can only be made to an IRA beneficiary, so the IRA must be retitled in beneficiary form for any distribution to take place. Until the IRA custodian accepts the death certificate or other documentation, they have no one else they can distribute to.
If the 2010 RMD does not get distributed by year end due to documentation delays, etc, it can be distributed later on and a Form 5329 can be filed by the beneficiary to request that the penalty be excused. This is almost automatic since many RMD deficiencies are not discovered in time, particularly when the death is late in the year.
Permalink Submitted by Jonathan Sard on Mon, 2010-10-11 18:01
Hopefully the last question…since the IRA must be retitled to an Inherited IRA in order to get the RMD that was supposed to be taken for 2010 from the deceased’s IRA, what happens if the beneficiary(s) want to disclaim, which they have until the end of next year to do. Won’t setting up the Inherited IRAs now mean that everything will be set in stone going forward? One of the IRA custodians said that an RMD for 2010 is not necessary because they have until 12/31/2011 to take out the first RMD. I know this is absolutely wrong, but I understand the logic. I have tried to look for other posts relating to this issue and I found a few from April and June of this year, but they were referring to spousal beneficiaries and not non-spouse beneficiaries. So…how does one handle this issue of retitling the IRA to take the RMD this year if they have until next year to actually determine the beneficiary AND do you have the code section that refers to this issue so we can send it to the custodian to refute their claim that no RMD is required in the year of the IRA holders death?? Thank you again!!
Permalink Submitted by Alan Spross on Mon, 2010-10-11 20:00
Following is Q&A #4 from IRS Reg 1.401(a)(9)-5:
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Q–4. For required minimum distributions during an employee’s lifetime, what is the applicable distribution period?
A–4. (a) General rule. Except as provided in paragraph (b) of this A–4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee’s date of death is determined using the Uniform Lifetime Table in A–2 of §1.401(a)(9)-9 for the employee’s age as of the employee’s birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee’s death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee’s death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.
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This also applies for IRA accounts. In addition, this situation is also covered in Pub 590, p 35, “Distributions in the year of the owner’s death”.
Further, in Rev Ruling 2005-36 the IRS clarified that the distribution of the owner’s RMD to a beneficiary does NOT disqualify the beneficiary from subsequently disclaiming all or part of the IRA by the disclaimer deadline, which is 9 months after the date of death (not the end of the following year as your post indicated).