IRA successor beneficiary question
I’ve been Googling this for the last 2 days and haven’t found an answer I’m comfortable with. Hopefully someone here can help!
Jan passes away in 2011 at age 55 and her husband, Dick, is the spousal beneficiary. Dick is 68 at the time of Jan’s death, and chooses to create an inherited IRA to delay the RMDs until Jan would have been 72 (2028). Dick dies in 2019 at age 76, having never taken an RMD from Jan’s inherited IRA account. Dick’s beneficiaries are his 3 grandchildren, all in their 20’s. What options to do the grandchildren have when they inherit the funds?
My confusion comes from a post that I read on kitces.com that states that under the Secure Act rules, because Dick hadn’t started distributions, he is actually treated as the original owner of the account. I don’t know if the rule was the same before the Secure Act? And if so, I’m assuming that the grandkids have the option to stretch the distributions over their life expectancies?
Permalink Submitted by Alan - IRA critic on Thu, 2021-05-20 19:41
The rule was the same before the Secure Act, and is found in IRS Reg 1.401(a)(9)-3, QA 5. This Reg resulted in the surviving spouse being treated as the employee (for an IRA the IRA owner), which meant that Dick was treated as the IRA owner for purposes of the RMD calculation for his beneficiaries, who would then be designated beneficiaries and could use their own LE for beneficiary RMDs instead of continuing to use Dick’s remaining LE. The Secure Act had no effect on this situation since Dick passed prior to Secure.
Now suppose that Dick had passed in 2020, post Secure. He would still be treated as the owner, however his beneficiaries would now be subject to the 10 year rule, unless they were EDBs which in this case would mean that they are disabled or chronically ill at the time of Dick’s death. As you can see, the Secure Act would have impaired the stretch that his beneficiaries would have received had Dick passed after 2019. Since he passed in 2019 however, his beneficiaries get the LE stretch. (NOTE: The GC have inherited the account in 2019 even if the inherited IRA was not retitled. If they are minors, an UTMA account or similar would have to be established to receive their RMDs or other distributions.
Permalink Submitted by Scott Stasik on Fri, 2021-05-21 13:22
Alan, thank you so much for this information and the citation. Much appreciated.