RMD in year of death
80 year old client died prior to taking her RMD in the amount of $14,000. Beneficiaries on the account are an individual (50%) and charities (50%). Does the individual who received 50% of the IRA have to take a distribution of 1/2 of the RMD or as the only taxable entity does she need to take the full $14,000?
Permalink Submitted by Alan Spross on Tue, 2010-11-30 04:13
Good question, and there are no IRS Regs I am aware of dealing with beneficiary breakdown of the decedent’s RMD. Accordingly, since the charity’s share will be fully distributed, there is no sense for the individual to take any part of the decedent’s RMD unless they want to. Of course, the IRS will get no tax revenue for distributions taken by the charity, but if they wanted to require that the RMD be split, they should have issued a Reg stating that.
This question frequently comes up with multiple individual beneficiaries as well, and there is no Reg requiring the decedent’s RMD to be split in any fashion between them. So if one of them needs the money anyway, that will satisfy the entire year of death RMD.
Permalink Submitted by fairira on Tue, 2010-11-30 06:09
Alan,
Let me ask about several different scenarios. An 85 year old owner of 2 traditional IRA’s of equal value took his RMD for his year of death. The designated beneficaries of his IRA 1 are 3 charities, the beneficiaries of his IRA 2 are his 3 sons (in their 40’s).
Q. 1: If the charities receive their IRA 1 distributions as lump sums in the year-after-the-IRA-owner’s-death, which is also the year when the 3 sons establish their inherited beneficiary IRA’s, do the sons need to each take an RMD that year? (I would think not.)
Q. 2: If the charities receive their IRA 1 distributions as lump sums in the year-after-the-IRA-owner’s-death but the 3 sons had established their inherited beneficiary IRA’s in the year of the IRA owner’s death, then do the 3 sons need to each take an RMD in the year after the IRA owner’s death? (Again I would think not.)
Q. 3: If the charities receive their IRA 1 distributions as lump sums in the year OF the IRA owner’s death, then in the year-after-the-IRA-owner’s-death would the 3 sons have to each take an RMD from their inherited beneficiary IRA’s whether established in the year OF the IRA owner’s death or in the following year. (I would think definitely yes in both situations.)
Thank you for your help.
Permalink Submitted by Alan Spross on Tue, 2010-11-30 19:02
Q1: If the charities receive their IRA 1 distributions as lump sums in the year-after-the-IRA-owner’s-death, which is also the year when the 3 sons establish their inherited beneficiary IRA’s, do the sons need to each take an RMD that year? (I would think not.)
Correct, they do not.
Q. 2: If the charities receive their IRA 1 distributions as lump sums in the year-after-the-IRA-owner’s-death but the 3 sons had established their inherited beneficiary IRA’s in the year of the IRA owner’s death, then do the 3 sons need to each take an RMD in the year after the IRA owner’s death? (Again I would think not.)
Since these are separate IRA accounts, after the owner’s death what is done with any of the two inherited accounts has no affect on the other. Also, whether the sons establish separate accounts in the year of death or the following year, the RMD requirement for them is the same. They must take their respective RMDs for the year following the death by 12/31 of that year.
Q. 3: If the charities receive their IRA 1 distributions as lump sums in the year OF the IRA owner’s death, then in the year-after-the-IRA-owner’s-death would the 3 sons have to each take an RMD from their inherited beneficiary IRA’s whether established in the year OF the IRA owner’s death or in the following year. (I would think definitely yes in both situations.)
Yes in both situations.
This scenario is relatively simple in comparison to a single IRA with both individual and charitable beneficiaries. In that situation, it is critical that the individuals establish their separate account by the end of the year following the year of death if they are to be able to use their individual life expectancies for RMDs in that year and thereafter. But it is even more critical if the charity does not distribute their lump sum by 9/30 of the year following death. If that were to happen, and the individuals also failed to act (eg due to late discovery of the IRA), the individuals would be relegated to RMDs based on the remaining life expectancy of the decedent because there was a non individual beneficiary as of 9/30 of the year following death. And if this same thing happened when the IRA owner passed prior to the RBD, the 5 year rule would apply.
Summary: Separating the IRA with the charity as beneficiary provides some RMD protection for the individuals.
Permalink Submitted by fairira on Fri, 2010-12-03 01:08
Alan, I’m unclear. Your answer to my Q. 2 was: “Since these are separate IRA accounts, AFTER THE OWNER’S DEATH [my emphasis] what is done with any of the two inherited accounts has no affect on the other. Also, whether the sons establish separate accounts in the year of death or the following year, the RMD requirement for them is the same. They must take their respective RMDs for the year following the death by 12/31 of that year.”
That answer would seem to me to apply also to my Q. 1, unlike my earlier supposition. That is, it now appears to me that the 3 sons (after establishing individual inherited beneficiary IRA’s) would have to each take an RMD from his IRA in the year-after-the-IRA-owner’s-death, unaffected by the charities in that same year taking lump-sum distributions derived from IRA 1.
Even if IRA 1 and IRA 2 were both still in the deceased owner’s name on 12/31 of the year of the owner’s death, presumably in the next year each ben’y would have to establish an inherited ben’y IRA and to then take its/his RMD based on its/his inherited share of IRA 1 or IRA 2. What am I missing re your answer to my Q. 1.?
Please, I hope you can put up with several more questions:
Q. A.: If the 85 year old owner of TIRA’s 1 and 2 had NOT taken his RMD before his death, then would your answer to dhutson’s original post similarly apply? That is, if the charities took lump-sum distributions in the year of death, the dead owner’s RMD would be satisfied for that year and the sons would not have to take any RMD until the following year regardless of the year they establish their inherited IRA’s.
Q. B: Vanguard’s beneficiary provisions provide for a % to be shown for each beneficiary but not for a specific dollar amount so that an IRA owner seemingly cannot specify a fixed dollar value to go to one primary ben’y with the remaining balance of the IRA account to go to a second primary ben’y. This may be part of Vanguard’s standardization but is there some inherent problem or disadvantage if one could allocate a fixed amount to one ben’y with the account balance (unspecified amount) to a second ben’y? E.g., though on a different matter, in a 6/17/03 advisory by Mary Kay Foss, CPA, she cautioned that any DISCLAIMER should be for all or a specific fraction of the primary beneficiary’s IRA inheritance(s) and NOT for a pecuniary/$ figure since a specific amount might trigger an income tax on that amount.
Thank you very much for your comments, Alan.
Permalink Submitted by Bruce Steiner on Fri, 2010-12-03 03:29
It’s not an income tax issue. The income tax issue would arise if the IRA were payable to the estate and the executor distributed the right to the IRA in satisfaction of a pecuniary (dollar amount) bequest.
The problem with leaving a dollar amount out of an IRA to one beneficiary and the rest of the IRA to another is that, unlike the estate itself, there is no executor for the IRA. So there is no one to decide which assets to sell to raise the money to distribute in satisfaction of the dollar amount, or which assets to distribute in kind in satisfaction of the dollar amount. As a practical matter, there is no way to leave an IRA to more than one beneficary except in fractional (or percentage) shares. That way, the financial institution can divide each asset pro rata.
Permalink Submitted by Alan Spross on Fri, 2010-12-03 04:09
Q A: Correct. The full distribution to the charity would satisfy the owner’s incomplete RMD for the year of death for both IRA accounts.
Q B: Addressed by Bruce Steiner in prior post. Vanguard has historically been uncomfortable with customized IRA beneficiary designations and at one time with any survival period as well. More recently, they wanted all accounts of an IRA owner at Vanguard to contain identical beneficiaries. I believe that they relented if the IRA owner stepped up with a logical explanation for naming separate beneficiaries. My guess would be that their legal dept must have become involved in some costly disputes, since they have long been risk averse on beneficiary issues.
Re Q 2 and Q 1 inconsistency – I misread Q1 as to the year, so response was incorrect. Answer should be that the sons need to take their individual RMDs for that year. That should bring this into agreement with Q2 which is that they would also have to take the RMDs in that case.
Permalink Submitted by Bruce Steiner on Fri, 2010-12-03 14:02
We’ve been able to do customized beneficiary designations with Vanguard (and many other financial institutions). Their primary concern is the same as ours — they want to make sure that there is no ambiguity as to who is entitled to what. They also don’t want to be responsible for having to figure out who is entitled to what.
Sometimes we have to negotiate language that’s acceptable to both us and the financial institution.
Permalink Submitted by fairira on Fri, 2010-12-03 23:09
Thank you both very much, Alan and B. Steiner, for your prompt and helpful information (as always). And, though a little early, Happy Holidays and Season’s Greetings.