Spouse and Child Named as Primary Beneficiaries
Client age 66 has named her 68 year old husband as 50% primary beneficiary of her mutual fund IRA, and child (from a previous marriage) as the primary beneficiary for the other 50%. An IRA expert stated that if there is a spousal AND a non-spousal beneficiary named as primary beneficiaries on the same account, BOTH will be treated a NON-SPOUSAL beneficiaries, and both will have to start taking RMD’s, regardless if the account is split after death. A service representative for the IRA custodian says not so – they WILL treat the husband as a SPOUSAL beneficiary, and added that there would be no advantage in splitting the account now. Who is right?
Permalink Submitted by Alan Spross on Fri, 2011-11-18 19:55
The service rep is closer, but both of them missed the mark. The actual result depends on certain actions that should be taken and some of them are time sensitive:
1) The surviving spouse can roll their share over to their own IRA anytime they wish and be treated as the owner from that year on
2) If for example, the age 68 husband wanted to avoid RMDs in 2 years, he could maintain his share as an inherited IRA until then and do the rollover when she would have reached 70.5. In the meantime:
a) If he creates a separate inherited IRA by the end of the year following her death, he can delay RMDs until she would have reached 70.5, ie. the separate account allows him to be treated as a sole spouse beneficiary.
b) If he does NOT create the separate account and neither does the child, then the RMDs are based on the oldest of the two using the single life table. But again, only until he decides to do the rollover. The main exposure here is to the child because the surviving spouse can always do the rollover, but if the child fails to create a separate account by the deadline the child be stuck with a larger RMD for good.
While the options above present some planning opportunities for husband to delay RMDs for up to two years, it would be simpler for the husband to just do the rollover right away. It would allow each to control the investments in their own IRAs, clearly name their own successor beneficiaries etc. If there is any basis in the IRA, they should each get 50% of it and file Form 8606.
Permalink Submitted by mk foss on Fri, 2011-11-18 19:58
When you have 2 beneficiaries with a percentage interest, they are allowed to split the IRA into separate accounts by 12/31 of the year after the owner’s death. In that way, they can each use their own life expectancy for RMDs and the surviving spouse would be allowed to do a spousal rollover.
The “IRA expert” may be remembering the rules that applied before the RMD regulations were changed in 2001.
The IRA could be split now, but it is not at all necessary.
Permalink Submitted by Sidney Poretsky on Fri, 2011-11-18 20:28
The main concern was that the husband wouldn’t be able to take RMD’s recalculated based on his life expectancey. So, thank you for clearing this up.