Last minute help with RMD for Inherited IRA

Submitted by Joshua Levy on Wed, 2010-12-29 16:43

Hi,

I’m new to the forum and was referred here from the Bogelheads forum ([url]http://www.bogleheads.org/forum/index.php[/url])

I am the owner of an Inherited IRA subject to a Required Minimum Distribution for the first time in 2010 and am not clear if I should base the RMD amount on my life expectancy or of that of the original IRA owner.

The inherited IRA came from my aunt who passed away in 2008 after reaching age 70 1/2. She had no spouse and no children and her estate was held in a revocable trust which became irrevocable after her death. The trust had multiple beneficiaries who were all individuals (a university was a contingent beneficiary, but all beneficiaries survived the settlor and took ownership of their share of the trust.) The trust was the beneficiary of the IRA and I was named as a beneficiary of the trust. The issue at hand is whether or not I am a “designated beneficiary” and on who’s life expectancy to base RMD calculations.

IRS Pub 590 (IRAs) discusses RMDs for “Beneficiary as an individual” and “Beneficiary not an individual” – my reading leads me to believe that because the IRA was originally held in a trust, I should use my aunt’s life expectancy. However, there is also a section called, “Miscellaneous Rules for RMDs” that under the heading “[b]Trust As Beneficiary[/b]” states that although a trust can’t be a designated beneficiary, “[b]the beneficiaries of a trust will be treated as having been designated as beneficiaries[/b]” if all of a number of qualifications are met. I believe I meet the qualifications and therefore hold some hope that I could use my life expectancy. I also see in writings about the subject that in certain situations the age of the oldest beneficiary should be used to calculate RMD. The IRA was distributed to beneficiaries and in my case, rolled over to the inherited IRA titled with the names of myself and my aunt.

I have had an accountant and the estate’s trustee tell me that I am not a “Designated Beneficiary”, though the “Trust as Beneficiary” section of Pub. 590 leaves me wondering if this is in fact true. If anyone has any experience or expertise in the matter, I’d greatly appreciate it.



Submitted by Jose Morales on Wed, 2010-12-29 17:06

[quote=”[email protected]“]The IRA was distributed to beneficiaries and in my case, rolled over to the inherited IRA titled with the names of myself and my aunt.[/quote]

I’m going to focus on this part of your post for now. Were checks actually given to each of the trust beneficiaries? I ask this because the rollover option is not available to non-spouse beneficiaries. If what you posted was accurate and the funds were distributed to each of the trust beneficiaries, then the rollover you completed to the inherited IRA was invalid and must be removed from the account as an excess contribution.



Submitted by Joshua Levy on Wed, 2010-12-29 17:31

My share of the original IRA was rolled over directly from the original custodian/brokerage into a newly created inherited IRA at the custodian where I hold my investments. Each beneficiary was given the option to receive a distribution of their share of assets (cash or percent of IRA investments) or open an inherited IRA and recieve distribution into that account. The distribution of the trust’s assets (including the IRA) was done under the supervision of a lawyer and a financial advisor and I believe the inherited IRA constitutes a valid rollover. What leads you to believe that the IRA can’t be rolled over to a non-spouse beneficiary?

Thanks.



Submitted by Alan Spross on Wed, 2010-12-29 17:43

It was just the terminology you used, but as long as the IRA was moved by direct transfer, ie you did not receive a check, then you have avoided a taxable distribution. If you had received a check payable to yourself you could not have rolled over the account. By “rolled over directly” you are apparently referring to a direct transfer.

As for your RMD, the special trust rules for qualified trusts allows the individual beneficiaries of the trust to be treated as designated beneficiaries for RMD purposes even though the trust itself is not a designated beneficiary. This allows you to use a life expectancy, but since the separate account rules do not apply to trusts, you must all use the life expectancy of the OLDEST beneficiary of the trust. Now you just need to be sure the trust met the conditions for qualification and determine who the oldest beneficiary was. Do not count successor beneficiaries who only inherit after the death of one of the individuals named as primary beneficiaries or the university, but if the university had received any portion here it would have blown up the life expectancies for the rest of you.

Use the age of the oldest beneficiary attained in the year after the year the IRA owner passed to determine the divisor and then reduce that divisor by 1.0 for each successive year thereafter.



Submitted by Joshua Levy on Wed, 2010-12-29 18:16

Thanks for the info. The oldest beneficiary is actually two years OLDER than the settlor, so there goes the fun of using my life expectancy for RMDs…

It wasn’t clear to me from the IRS info whether the [b]separate account rules[/b] could be used for trusts; if not, then it’s just a matter of determining if the trust is qualified. The only item for qualification I’m unsure of is whether or not a copy of the trust document has been provided to the IRA custodian within the IRS time limits. Couple questions:

Does the trust document need to go to the original IRA custodian or the new Inherited IRA custodian?

If I’m not able to determine if the trust is qualified before Dec. 31 and don’t take enough RMD, would the IRS likely waive the 50% penalty if I follow their procedures for paying the difference with Form 5329 and letter of explanation?



Submitted by Alan Spross on Wed, 2010-12-29 18:52

Separate account rules not applying to trusts is stated in Pub 590, p 38.

Trust documents are provided to the IRA custodian holding the IRA at the time documents were/are submitted. Deadline is 10/31 of the year following year of settlors death, so that has long since passed, but SEE BELOW why this may not matter.

IRS often waives the 50% penalty with any logical “reasonable cause”. Follow the 5329 instructions to request the waiver.

You mentioned IRA owner passed after 70.5, but the pivotal date is the required beginning date a few months later. Assuming she passed after the RBD, then there is no need for the trust to be qualified since a non individual beneficiary uses the remaining life expectancy of the decedent (Pub 590, p 36.), and this is 2 years longer than the oldest trust beneficiary anyway.



Submitted by Joshua Levy on Wed, 2010-12-29 20:35

[quote]You mentioned IRA owner passed after 70.5, but the pivotal date is the required beginning date a few months later. Assuming she passed after the RBD, then there is no need for the trust to be qualified since a non individual beneficiary uses the remaining life expectancy of the decedent (Pub 590, p 36.), and this is 2 years longer than the oldest trust beneficiary anyway[/quote]

The decedent (or her trust) had taken the first RMD for the original IRA in 2008. Therefore, I’m assuming that the required beginning date had been reached and that I would use her life expectancy for RMDs, not the five-year rule.



Submitted by Alan Spross on Wed, 2010-12-29 21:01

Perhaps, but you should confirm that to be the case since an assumption could well be incorrect. Any distribution taken in an RMD distribution year is considered an RMD, and it is possible to take an RMD 15 months prior to the RBD.

Example: Turns 70.5 anytime in 2008, the RBD is 4/1/2009. So a distribution in Jan, 08 is the 08 RMD even though it is well before the 4/1/09 RBD. But if IRA owner passes prior to 4/1/09, they died before the RBD and the 5 year rule could apply if trust not qualified.

Note: 2009 RMDs were waived, but not to 2008 RMDs deferred to 2009.



Submitted by Joshua Levy on Wed, 2010-12-29 22:32

She turned 71 in June of 2008 and died in July of the same year – so she died before the RBD of 4/1/09; looks like the trust needs to be qualified after all.



Submitted by Alan Spross on Wed, 2010-12-29 22:40

Not so. If she turned 71 in June of 08, then she turned 70.5 in Dec of 07. Therefore her RBD is 4/1/2008, and she died in 7/08 after the RBD. Trust qualification therefore irrelevant.

The RBD relates to the year 70.5 is attained, not 71.



Submitted by Joshua Levy on Wed, 2010-12-29 22:44

Right 70 1/2 not 71 – thanks for the correction. That makes things simpler if qualification is irrelevant

With that in mind, is this the correct way to calculate the RMD?

IRS Table I
(Single Life Expectancy)
(For Use by Beneficiaries)
AGE LIFE EXP.
71 16.3

My calculation:
16.3 (life exp. at year of death [2008]) – 2 (years since death) = 14.3

Account Balance (12/31/09) divided by 14.3 = 2010 RMD



Submitted by Alan Spross on Wed, 2010-12-29 23:32

Correct analysis.
The total stretch out period is therefore 16-17 years for all trust beneficiaries, but with separate accounts any of them can draw their account down faster if they wish.



Submitted by Joshua Levy on Thu, 2010-12-30 00:09

Thanks so much for help! It’s all been very helpful and enlightening.

Happy New Year.

Josh



Submitted by Bruce Steiner on Thu, 2010-12-30 03:31

Why would anyone go through the effort of creating a trust and naming it as the beneficiary of her IRA only to have the trust end at her death with the assets, including the IRA, going to the beneficiaries outright? All it accomplished was to prevent the younger beneficiaries from using their own life expectancies for their shares of the IRA.

If she wanted to provide for her beneficiaries outright, she could have simply named them as the beneficiaries of her IRA, rather than running the IRA through a trust. Or, if she wanted each beneficiary to receive his/her share in trust, she could have set up a separate trust for each beneficiary and leaving the IRA to those trusts.



Submitted by Joshua Levy on Thu, 2010-12-30 04:51

No kidding! My guess is that she wasn’t aware of the downside of naming the trust as beneficiary of the IRA and was guided by the lawyer who set up the trust. I’m sure many people have unwittingly done the same and prevented their beneficiaries from having the advantage of a longer period of withdrawal. At least she reached 70.5 in 2007 (barely!) and lived past the RBD; if not, the 5-year rule would have applied which would have been even worse.

I’ll certainly share my experience with others in similar situations.



Submitted by Bruce Steiner on Thu, 2010-12-30 14:02

A broader question — from the facts presented, it sounds like this may have been a revocable trust. Was it a revocable trust? If so, was there any particular reason for her to have a revocable trust? While there are reasons for creating revocable trusts in some cases, revocable trusts are overhyped and oversold, and for most people (with the possible exception of people in California) are not necessary. And people who create them often leave their IRAs to them, thus creating lots of problems, such as the one here, among others.



Submitted by mk foss on Thu, 2010-12-30 18:11

Yes Bruce, people in California are exceptional. Happy New Year to all Forum-sters.



Submitted by Jose Morales on Thu, 2010-12-30 18:21

[quote=”[email protected]“]Why would anyone go through the effort of creating a trust and naming it as the beneficiary of her IRA only to have the trust end at her death with the assets, including the IRA, going to the beneficiaries outright? All it accomplished was to prevent the younger beneficiaries from using their own life expectancies for their shares of the IRA.

If she wanted to provide for her beneficiaries outright, she could have simply named them as the beneficiaries of her IRA, rather than running the IRA through a trust. Or, if she wanted each beneficiary to receive his/her share in trust, she could have set up a separate trust for each beneficiary and leaving the IRA to those trusts.[/quote]
I completely agree with this. Although we cannot take on the role of estate planner for our IRA clients, I try to make sure that any client naming a trust as a beneficiary is at least asked if they have spoken with either an estate planner or attorney familiar with IRAs to determine if this is the best decision. If the person knows who they want to leave their IRA assets to upon death, it is much simplier to just name them as beneficiaries rather than a trust.



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