Non-Spousal Beneficiary Planning question

Submitted by Jonathan Ingram on Wed, 2016-09-28 14:31

A client recently lost his Grandmother and she has several IRA annuity contracts with multiple carriers (Hancock / AXA / RiverSource) We have not yet contacted the carriers yet to see what options they allow. I have had previous experience with RiverSource contracts and they have in the past required that the bene take the lump sum instead of allowing the 5 year out option or life expectancy payments; therefore, forcing a taxable event on the bene. Of coarse, I feel that this is wrong because it could cause a bene to leap into another taxable income bracket. Anyhow, that is another conversation.

In this case the grandmother had begun RMD’s, and it is my understanding that the non-spousal bene’s of her IRA’s will be required to take the Five year out rule. My question is this, To rule out a future planning strategy for other clients of mine and their respective beneficiaries, would it be acceptable to begin taking an aggregate RMD amount from one specific contract and not begin the RMD’s on others; therefore, presumably, preserving the right of the beneficiary to take life expectancy payments instead of the 5 year rule from the inherited contracts in which the RMD were not actually taken?

Thank you for any insight you can provide.



Submitted by Alan - IRA critic on Wed, 2016-09-28 22:15

  • The 5 year rule does not apply when the IRA owner passes after the required beginning date. However, the insurance company contract can still require the contract to be terminated within a time limit, but taxation can still be avoided by doing a direct trustee transfer to another IRA custodian (not an insurance product) after which annual life expectancy RMDs can be taken by the beneficiary. SInce all the IRAs were inherited from the same decedent, they can be combined into a single inherited IRA since all the RMD divisors will be the same. Make sure the grandmother was the owner of these accounts and not a beneficiary herself which would make the client a successor beneficiary. As for the insurance contracts, the beneficiary clauses should be read to see what the options are for death after the RBD. The main question to ask is whether they are refusing to cooperate with a direct transfer requested by the client through a new custodian for the inherited IRAs. If they refuse a transfer per the terms of their contract, that would be extremely anti consumer policy.
  • Note that the client is responsible to complete the year of death RMD if grandmother did not do so.
  • Re your question. This would not work because RMDs for all IRAs of an IRA owner are deemed to have begun at the required beginning date whether a particular account has distributed or not. Therefore, aggregating RMDs by an owner is immaterial to whether RMDs have begun or not. For clients who are concerned with beneficiary options, they have to determine what the beneficiary options will be before purchasing an IRA annuity. Most of these contracts are not beneficial after the owner passes. Most standard IRA custodians do not further restrict the IRS Regs regarding RMDs for beneficiaries. but with IRA annuities it is common. Note that if the insurer is willing to issue a check to the next custodian FBO beneficiary’s inherited IRA, that will qualify as a direct transfer even when mailed to the beneficiary for delivery to the new custodian.


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