Twice Inherited BDA
Hello,
I have a question on twice inherited IRAs. Both decedents died PRE-SECURE Act.
Bob dies at age 75 and leaves his assets to his wife, Mary. For whatever reason, Mary did NOT treat assets as her own, but elected the spousal beneficiary option and starting taking RMDs based on her own single life expectancy, re-determined annually. Mary died in 2018 and left the assets to her daughter and her daughter has accepted the funds into her own non-spousal inherited IRA.
How does the daughter calculate RMDs moving forward? Does she use the same schedule her Mom used and re-determine her decedent Mom’s age annually? OR…..because she is a non-spouse, does she have to use the “reduce by 1” method moving forward since she is a non-spouse?
Thanks
Kevin
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 20:57
This could become complex as you will see. Because the last death was pre Secure, the daughter would continue the RMD schedule of Mary, except that the 1.0 divisor reduction would start in 2019. No RMD for 2020, and the 2021 divisor would be 2.0 less than the 2019 divisor. Then in 2022 with the new IRS RMD tables, the 2022 divisor must be reset to what it would have been had the new tables existed all along. That would start with Mary’s divisor for the year after Bob passed, recalculated each year through 2018, and the 1.0 reduction starting in 2019.
But what if Mary was older than Bob. You did not indicate her age. If older she should have used Bob’s non recalculated age until the year her own recalculated divisor would have been higher (lower RMD) than the non recalculated divisor using Bob’s age. Refer to p 10 of Pub 590 B (Surviving spouse is sole designated beneficiary) where it states that the life expectancy the surviving spouse must use may change in a future distribution year. Of course, if Mary was the same age or younger than Bob, her RMDs would not start using his LE).
That’s not all – If Mary failed to take her full beneficiary RMD in any year, she would default to ownership status for that year forward. So it may be worth checking to see if Mary did in fact at least meet her beneficiary RMD requirement. Because if she didn’t, even fell a dollar short, she defaulted to ownership of that inherited IRA regardless of it being titled in beneficiary form. This would have a large impact on daughter, because if Mary did become the owner, then daughter was a designated beneficiary in 2018, not a successor beneficiary. In such a case daughter’s RMD starting in 2019 would have been based on her own single LE, reducing her RMDs compared to being a successor beneficiary to Mary.
If Mary did not complete her correct RMD in 2018, daughter was responsible for doing so. Mary’s correct RMD for 2018 of course depends on whether she was still a beneficiary or had defaulted to ownership, unbeknownst too her.
Permalink Submitted by Kevin O'Hearn on Tue, 2021-10-26 22:11
Thank you Alan. With respect to the new RMD tables…..I was under the impression that benes using the 1.0 division reduction would be grandfathered into that and would not have to recalculate? Are you saying that if a non-spouse inherited assets 10 years ago and has been using the 1.0 division reduction method, they now have to reassess what the 2022 factor will be as if the new tables were used all along?
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 23:17
Yes, this is a one time adjustment for 2022 to determine the first divisor using the new table. Once the 2022 divisor is determined, then that divisor is still reduced by 1.0 for each year thereafter. To determine the 2022 divisor, the new table would be substituted for the current table in determining Mary’s RMD per the complex options outlined above. All that investigation does not need to be repeated, and the methodology to determine Mary’s divisor stays the same except for the table divisors being different for the same ages. The first step is to determine if Mary was older than Bob or not. Then determine if she took her full RMD based on the correct divisor or not. She did not default to owning the IRA unless she fell short of any RMD, such as forgetting the RMD for a year. It’s just a fluke that after determining the correct divisor for the daughter in 2021, that the tables change for 2022 requiring the beneficiary RMDs to be reset. If you can provide Mary’s age in the year Bob passed and the year he passed, I can post her RMD divisors and daughter’s divisors through 2021. Only thing I cannot determine is whether Mary fell short of her beneficiary RMD in any year, which would have made her the IRA owner.
Permalink Submitted by Kevin O'Hearn on Wed, 2021-10-27 14:38
Thanks again Alan. One last follow up……has it always been the case where a missed RMD results in a spousal inherited IRA being treated as the spouse’s own? Is this a new rule? I can tell you that custodians don’t track missed RMDs and wont update account registrations if this happens. Also, is it a new rule for if a spouse is older with a spousal inherited IRA that they can use the younger decedent spouse’s age, reduced by 1, for RMDs? I always thought all spousal inherited RMDs we done off spouse bene’s age, re-determined annually.
Permalink Submitted by Alan - IRA critic on Wed, 2021-10-27 15:11
Yes, a sole surviving spouse missed beneficiary RMD has always resulted in a default to ownership status. Custodians cannot retitle the IRA because they do not know if the beneficiary might have completed the RMD from another spousal inherited IRA. Cite IRS Reg 1.408-8, QA 5(b). This rule was more helpful to successor beneficiaries before Secure, since under Secure the beneficiary will probably fall under the 10 year rule in most cases. Of course, in your case here, Mary’s death was pre Secure, so if Mary fell short on a beneficiary RMD, daughter would then be a designated beneficiary and get a full stretch.
The rule that a beneficiary (any beneficiary) could use the life expectancy of the decedent if longer than their own as also existed for many years. But the IRA owner must pass after the RBD (as Bob did) to qualify to use the decedent’s LE. This might not have come up very often in the past because when the owning spouse passes after RBD, the even older surviving spouse will almost always do the spousal rollover to be able to use the Uniform Table and lower the RMD. For this rule to reduce RMDs for a surviving spouse, that surviving spouse would have to be around 85 or older. Note that this rule also applies currently (post Secure) to non spouse beneficiaries who are EDBs. Following is a handy chart for post Secure Act deaths, and it refers to this rule (death after RBD).
Microsoft Word – Beneficiary Options Chart – for David Baker.docx (benefitslink.com)