Trying to understand a successor beneficiary’s options

Submitted by Chris Baker on Thu, 2023-10-26 16:33

I have a more complicated than usual case and I want to make sure my understanding is correct with all the changes in rules for inherited IRAs.

Here is a summary and how I think it works.

Client A (DOB 9/19/1965) had an IRA and passed on 7/19/2022 at age 56 (was not taking RMDs)
She left this IRA to her mother Client B who was 88 years old (DOB 4/26/1934) at the time
My understanding is that Client B is an Eligible Designated Beneficiary because she is not more than 10 years younger than Client A
This means she has the option to stretch it over her lifetime using her life expectancy.
So she would be required to take her first beneficiary RMD this year with a life expectancy of 6.1 years.
But she has the option to instead use the 10 year rule which in her case is more favorable as there are no required distributions (because Client A was not taking RMDs) and it is longer than her life expectancy

But before taking any distributions, Client B passed on 6/30/2023 leaving the account to the successor beneficiary, her sister Client B who turned 73 this year (DOB 8/25/1950)
If Client B was using the 10 year rule then Client C would have to continue that same time period and liquidate the account within 9 years. She does not get a new 10 year period
If Client B was using the life expectancy distributions then Client C gets kicked into the 10 year rule and has to liquidate the account by the end of the 10th year but does not have to take any RMDs because Client A was not taking RMDs
Client B had the choice of life expectancy distributions or the 10 year rule but I don’t believe there is a way to specifically say or notify the IRS of which she decided to do so there is no record or documentation
Had Client B not passed, the 10 year rule would have been her choice but because of her death that then leaves Client C with only 9 years
Had Client B used the life expectancy option she would have had to take a $27k+ distribution this year
But due to the confusion on all of these new rules and the final regulation not expected to come out until 2024, the IRS has issued relief for 2021, 2022, and 2023 saying they will not penalize anyone for missed distributions, nor force them to take those distributions

So I think the best option for Client C is to assume Irma was using the life expectancy method but not take that RMD (there will be no penalty) and then she has 10 years with no RMDs to liquidate the account.

Is this accurate or am I missing something?



Submitted by Alan - IRA critic on Thu, 2023-10-26 17:52

  • Very good analysis except that the IRS 2023 beneficiary RMD relief does not apply here. The IRA agreement during the limbo period for Secure Act Regs will likely default to EDB treatment for B, creating a beneficiary RMD for 2023 which was not waived by the IRS, therefore C will have to complete B’s 2023 EDB beneficiary RMD by the tax filing deadline. C could therefore split that RMD between 2023 and 2024 if that were to be beneficial for tax purposes, as long as the 2023 beneficiary RMD is completed by the tax filing deadline for 2023. C would then have no annual RMDs before the lump sum requirement in 2033, but would likely benefit by spreading the taxable income over more years.
  • So the trade off for C would be gaining an additional year for distributions if B is treated as an EDB but with the larger up front distribution (B’s high annual 2023 beneficiary RMD) taxable in 2023, 2024, or some combination of those two years. 
  • If opting out of EDB treatment and into the 10 year rule was desired to eliminate the large beneficiary RMD for 2023, the probable procedure would be for B’s executor to notify the IRA custodian on behalf of B of the opt out prior to 12/31/2023. However, the custodian might balk or refuse to so document their file, or might not even have a policy for this in place. 

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