Designated and Non-Designated Beneficiaries

Submitted by James Bradley on Mon, 2017-10-09 19:49

I have Designated (son) and Non-Designated Beneficiaries (3 charities) to my traditional IRA. I would like to clarify that my personal representative under my will would have until 12/31 of the year after my death to split the IRA in two separate IRAs where one of the new IRAs listed my son as the sole beneficiary (making him a Designated Beneficiary) and the other new IRA with the 3 charities as beneficiaries. If this assumption is accurate then my assumption is that my son would have the option of taking the RMDs from his inherited IRA under the “stretch” provisions.

I further assume that paying off the charities almost immediately (which I’m sure would not be an issue) and leaving my son as the sole beneficiary would not, under that circumstance, allow him to be a Designated beneficiary. There was a little confusion in my mind that if the charities were paid off by 9/30 of the year following death that it might leave him as a Designated beneficiary.

Thanks for anyone’s help on this matter.

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Permalink Submitted by Alan - IRA critic on Tue, 2017-10-10 01:11

Yes, it is critical that your son create his own separate inherited IRA by 12/31 of the year following the year of your death. That removes the contingency of how long it takes to pay off the charities. However, in the event your son did NOT act, but all 3 charitable shares were fully distributed by 9/30 of that year (known as the beneficiary determination date), he would still be treated as having a separate inherited IRA account. But he should be advised to be pro active and act on his own rather than depending on the others to act promptly.

Permalink Submitted by James Bradley on Tue, 2017-10-10 18:23

Thanks Alan, I appreciate you taking the time to respond. So just to clarify for my understanding — If the 3 charities were paid off prior to 9/30 of the year of my death then it would leave my son as the only unpaid beneficiary. Therefore, he would not have to create a separate IRA and he would be entitled to take the “stretch” because he is only beneficiary left and with a “designated” classification. Additionally, if one or more charities were not paid off by 9/30 of the year after my death then he better get busy having the custodian set up a new “inherited” IRA with him as the only beneficiary. He would have until 12/31 of that year (3 months) to get that done. Additionally, he would need to make sure he took his RMD for that year prior to 12/31 as well. Is my understanding correct?

Permalink Submitted by James Bradley on Tue, 2017-10-10 18:05

Permalink Submitted by Alan - IRA critic on Tue, 2017-10-10 19:45

Yes, that is correct.

Permalink Submitted by Bob Foland on Thu, 2020-11-19 17:03

Rather than post another question for you to field, I first look for instances where you have answered the same question that I have. This is one of those, but it raised another question for me. The deadlines discussed in both the question and the answer refer to the year of death. Don’t these deadlines apply to the year after the year of the IRA owner’s death? If not, and the IRA owner died in the fourth quarter of the year, the beneficiaries would have no remedy, would they?

Permalink Submitted by Alan - IRA critic on Thu, 2020-11-19 18:13

Yes, the beneficiary determination date is 9/30 of the year following the year of death. The OP referred to both the year of death and the year after in various places, so I think he knew that the year after applied, but did not take the time to describe it correctly. The separate account rules deadline is also 12/31 of the year following the year of death.
In the opening post, the OP also mentioned that the executor had to meet this deadline. This is incorrect unless the estate was the IRA beneficiary. In this particular case, the son was a designated beneficiary and the charities were non designated beneficiaries, so the executor would have no authority to request account changes. And if the estate had been the beneficiary instead, while the executor could assign the IRA out of the estate, the separate account rules would not apply to the son in that situation.

Permalink Submitted by John Peterson on Wed, 2017-10-11 21:26

Would it make sense to avoid all the potential post-death issues by putting son’s share in a separate IRA prior to death?

Permalink Submitted by Alan - IRA critic on Wed, 2017-10-11 22:25

That should make the post death actions less time constrained, with the trade off being less simplicity prior to IRA owner’s passing. It might be wise if the son is prone to dragging his feet on financial issues. However, if son is sharp and pro active and the IRA is not separated I suggest he sets up his own separate inherited IRA account ASAP and he can then forget what is done with the charitable shares. That is preferable to monitoring the charitable shares to see if they are paid off by 9/30 with the intent of not moving the IRA unless they are not. Son may also want to change custodians in any event.