IRA distributions after first spouse’s death

Submitted by Buck McCrone on Tue, 2017-02-28 19:42

The Custodial Agreements of two major IRA Administrators provide that if an owner dies after beginning to receive RMDs, and the surviving spouse begins to receive distributions and then dies, the next beneficiary will receive distributions of the account balance over the life expectancy of that second spouse, not over the typically longer life expectancy of that next beneficiary.

They also provide that if that next beneficiary had inherited the account without it first beginning to be distributed to a surviving spouse then distributions would be made over that next beneficiary’s life expectancy.

In commenting on this the Administrators say that the longer life expectancy of the next beneficiary can be produced in the first case by the surviving spouse taking the decedent’s IRA as his or her own and designating the next beneficiary as his/her primary beneficiary.

That may be correct, but what if the surviving spouse does not create that result or perhaps lacks the capacity to do it, is it necessary (is it required by law?) that the next beneficiary can receive distributions only over the life expectancy of the surviving spouse?

If it is not necessary, why should the Custodial Agreement contain such a provision? Why not simply say the next beneficiary would receive distributions over that beneficiary’s life expectancy?.



Submitted by Alan - IRA critic on Tue, 2017-02-28 20:07

  • This is all governed by the IRS Regulations. A beneficiary of an IRA can generally only use their own life expectancy if they inherit the IRA from an owner of the IRA. If they inherit the IRA from the designated beneficiary of that IRA, they are a successor beneficiary and must continue the RMD schedule of the first beneficiary.
  • There are some exceptions to the above. If a surviving spouse does not yet have to take RMDs as the beneficiary because the deceased spouse would not yet have reached 70.5., the beneficiary named by the surviving spouse is treated as the designated beneficiary rather than a successor beneficiary.
  • Another exception is when a sole surviving spouse beneficiary fails to take the RMD required as beneficiary. In that case the surviving spouse defaults to ownership status and their beneficiary is treated as a designated beneficiary. A beneficiary of the surviving spouse should investigate if the surviving spouse ever fell short of taking a full beneficiary RMD. If so, they became the owner at the end of that year even if they were never aware of it and the IRA was not retitled to ownership status.
  • An IRA agreement can contain more restrictive provisions that the IRS RMD requirements, but the IRS requirements cannot be made broader. Therefore, most IRA agreements will state the IRS Regulations exactly as they are. They cannot relax them, but also usually do not replace them with more restrictive provisions either. The exceptions listed above are usually included in the IRA agreement as well and this explains why they do not include the simple statement you asked above. There are usually some exceptions to almost everything and that is why the tax code is so long.
  • For this reason a surviving spouse should always roll over the account to their own IRA as soon as any benefit of leaving it inherited has expired. Such benefits are typically penalty free distributions under 59.5, or delaying RMDs until the decedent would have reached 70.5 if the surviving spouse is older. If there two exceptions no longer apply, the rollover to ownership status should be done before it is overlooked and the next beneficiary does not get a new stretch.

Submitted by David Mertz on Tue, 2017-02-28 20:26

  • It appears that this provision in the custodial agreement results in an inherited IRA with the surviving spouse as the sole beneficiary being automatically treated as if the surviving spouse had elected to treat the IRA as the surviving spouse’s own in the year of the surviving spouse’s death.  As an IRA owned by the surviving spouse, if the surviving spouse did not name a designated beneficiary, the IRA would be subject to the 5-year rule or distributions over the surviving spouse’s life expectancy depending on whether the surviving spouse died before or after the surviving spouse’s RBD.
  • Under some circumstances, the IRA automatically becoming the surviving spouse’s own could result in a shorter stretch than if the account did not automatically become the surviving spouse’s own with the surviving spouse’s beneficiary being treated as a successor beneficiary.

Submitted by David Mertz on Wed, 2017-03-01 01:15

Ah, yes, I forgot about that statement in Pub 590-B.  I believe that it derives from § 401(a)(9)(B)(iv)(II) and refers to the surviving spouse dying before the surviving spouse’s RBD as beneficiary.  The language in the custodial agreement simply reflects that statute and is not a unique feature of that particular custodial agreement.  It’s separate from defaulting to owner status due to a missed RMD or making a contribution to the account.

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