Inherited IRA RMD rules for an obscure situation
Background:
- A client (we’ll call Spouse 1) passed away in 2021 (so subject to the post-SECURE Act inherited IRA rules). His spouse (we’ll call Spouse 2) was the primary beneficiary.
- A few months later in the year, Spouse 2 passed away, but she passed away before she had the opportunity to roll Spouse 1’s IRA into her own.
- Spouse 2’s IRA was paid out to an inherited IRA for her son, who was her beneficiary. If Spouse 2 had rolled Spouse 1’s IRA into her own before she passed away, then Spouse 1’s IRA would have been included here, and we would be done. However, because Spouse 1’s IRA had not yet been rolled, those assets could not follow the beneficiary designation of Spouse 2’s IRA, and had to instead be paid to Spouse 2’s estate (that was our firm’s logic, whether right or wrong).
- Their son was also the executor of the estate. Our firm allowed the assets to skip over the step where the assets would be titled to the estate, and go ahead and pay Spouse 1’s IRA directly to an inherited IRA in their son’s name, since he was the beneficiary of the estate as well.
The question here is whether the bene RMD rules are decided by a) the wording/procedure governing the beneficiary designation on the decedent’s IRA (which would be the estate), or b) by the nature of the person/entity the ultimately physically receives the decedent’s IRA assets (the son).
I understand that an inherited IRA for an estate has two options – it can be distributed discretionally following the 5-year rule for entities, or it can be stretched following the decedent’s single life table using declining calculation method not recalculating. And an inherited IRA for a non-spouse beneficiary who does not meet any of the qualifications for an Eligible Designated Beneficiary has to distribute the inherited IRA following the 10-year rule, with RMDs to be taken years 1-9 since the decedent had passed her RBD.
Do we assume the distribution schedule for the estate or for the son?
Permalink Submitted by Alan - IRA critic on Wed, 2024-12-18 11:57
The RMD rules in this case trace back to whether Spouse A passed prior to RBD or after. I’ll guess that because both spouses passed in the same year, that Spouse 1 passed after their RBD and Spouse 2 took no action before passing. In such a case most IRA agreements would make Spouse 2’s estate the default beneficiary. If so, her estate is a successor beneficiary as is the son, to which an inherited IRA was assigned out of the estate.
In this situation, the son’s RMD is based on the longer remaining single life expectancy of either Spouse 1 or 2, as death post RBD allows the beneficiary (Spouse 2) to use the longer of their own or the decedent’s life expectancy. The age of son is irrelevant since the estate and himself as the estate beneficiary are successor beneficiaries. Finally, the son is also subject to the 10 year rule (after death of EDB Spouse 2) which means the inherited IRA must be drained in 2031 if there is still a balance in 2031.
Now, if Spouse 1 happened to have passed prior to RBD, that will change everything because in that case Spouse 2 would be treated as the owner for RMD purposes and their estate would not be a successor beneficiary. Distributions from the estate (son) would then depend on whether Spouse 2 passed prior to RBD or after.
Son will not be able to combine or aggregate beneficiary RMDs of these 2 inherited IRAs because they will be subject to different RMD rules.