Estate Inherits an IRA due to NO beneficiary designations on file

Submitted by Kirsten Ismail on Thu, 2020-02-27 21:31

A client’s mother passed away in 2018 (at age 85 so after RBD) and her IRA had no beneficiary designations on file so the estate became the beneficiary. All beneficiaries agreed to have the value of the IRA split equally between the living beneficiaries, so 3 children and each received one third of the IRA as an Inherited/Bene IRA. My client was told at the firm in which the account originally resided and where the Inherited IRAs were opened and funded that each beneficiary had to fully distribute their Inherited IRA balance within 5 years after the year of the mother’s death. Is this correct?
I thought that if this situation unfolded after the IRA owner’s RBD then they could continue to use the life expectancy of the original owner or the oldest beneficiaries life expectancy???
My client does not need the income and is in the highest income tax bracket.
Thanks in advance for your help!
Kirsten



Submitted by Alan - IRA critic on Thu, 2020-02-27 22:52

  • The 5 year rule does not apply for deaths after the RBD as is the case here, and the custodian was wrong. That said, there is still only about 5 years left from now using the decedent’s remaining life expectancy. If decedent would have been 85 at the end of 2018, the first RMD divisor for each beneficiary for 2019 would have been 6.6, then 5.6 for this year etc.
  • The beneficiaries are also responsible to complete the 2018 year of death RMD of the decedent if that was not done before passing. It’s possible that this was not done by the end of 2018, and also possible that the 2019 beneficiary RMDs were not completed. If so, these missed RMDs must be made up and Form 5329 filed for each year to request the penalty waiver.
  • The year of death RMD does not have to be taken in proportion. The beneficiaries are only jointly responsible for the 2018 decedent’s RMD, and perhaps one beneficiary will want to take a distribution large enough to complete that.

Submitted by Kirsten Ismail on Fri, 2020-02-28 21:04

Thank you! The RMD was taken before the owner passed and they did take the 2019 RMDs. 

Submitted by Kirsten Ismail on Fri, 2020-02-28 21:29

Hi Alan,I am wondering if you could provide a link to the RMD Divisor table showing the 6.6 for 2019 and 5.6 for 2020?  I am trying to find a table that matches those divisor numbers but have been unsuccessful.  I am trying to understand why it’s only the 5.6 years left when any distribution table I pull up shows around 14.8 distribution period for an 85 year old. Thank you!Thank you,Kirsten

Submitted by Alan - IRA critic on Sat, 2020-02-29 00:02

  • The single life table applies. However, when RMDs are based on the age of the decedent the table is entered using the age of the decedent in the year of death. That divisor is 7.6 but is just an entry point. Starting with the year of the first beneficiary RMD (2019), the year of death divisor is reduced by 1.0 for each year and is therefore 6.6 in 2019, 5.6 for 2020 etc. No need to re visit the table each year.
  • That said, there is expected to be new tables introduced for 2021 that will change the 2021 divisor from the expected 4.6 using the above formula. Come 2021 the divisors need to be reset to what they would have been had the new tables been in force in 2018. The expected new table divisor for age 85 is 8.1 instead of 7.6. Therefore, the 2021 divisor is expected to be 5.1 (8.1 less 3 for 3 years until 2021). New tables only come along about every 15-20 years and it just happens that 2021 is one of those years. Just a heads to watch for this starting next year. The new tables do not affect any RMD prior to 2021.

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