Inherited IRAs for Spouses, Non-Spouses, Trusts and Estates

It is somewhat common for advisors to be dealing with clients who have accumulated significant mutual fund, IRA or annuity IRA account values.  As a result of rollovers and direct transfers from 401(k) plans, profit sharing plans, defined benefit plans, and 403(b) plans, it is not uncommon for successful business owners, professionals, and wealthy individuals to have large six figure or seven figure IRA balances.

 

IRAs have become valuable financial assets that can be managed and preserved over a long period of time.  This preservation and management can be accomplished for spouses and non-spouses even long after the IRA owner has died if certain distribution rules are followed.

 

Here is a detailed summary of the distribution options available to spouses, non-spouses, trusts, and estates for inherited IRAs under IRC Section 401(a)(9) and Treasury Regs. 1.401(a)(9)

 

Inherited IRA Distribution Options for:

 

A)    Spouse Designated Beneficiary

 

  1. 5 year rule:  Account values must be totally distributed within 5 years of death
  2. Life expectancy rule:
      •   a. By December 31st of the year following the owner’s death using the Single Life Table for Required Minimum Distributions (RMD) … OR
      •   b. By December 31st of the year the deceased would have attained age 70 ½ using the Single Life RMD Table
  3. Spousal rollover to IRA owned by the surviving spouse. Spouse names a new beneficiary. Spouse takes RMDs at age 70 ½ using the factor from Uniform Lifetime Table each year

 

B) Non-Spouse Designated Beneficiary

 

  1. 5 year rule:  Account values must be totally distributed within 5 years of death
  2. Life expectancy rule:  By December 31st of the year following the owner’s death using the Single Life RMD Table.  Use the life expectancy of the oldest beneficiary.

C) Trust as Designated Beneficiary

 

  1. 5 year rule:  Account values must be totally distributed within 5 years of death
  2. Life expectancy rule:  By December 31st of the year following the owner’s death using the Single Life RMD Table.  For “common share trusts”, use the trust beneficiary with the shortest life expectancy as the measuring life (i.e. usually the oldest child).  For “separate share trusts”, use the life expectancy of each separate share beneficiary.  See PLR 200537044 for the blueprint of separate share trust inherited distributions
  3. Trust will receive RMDs and serve as a conduit to pass RMDs to the trust beneficiaries.  Trustee will issue a Trust K-1 to each trust beneficiary who will place this K-1 amount on Schedule E of their personal Form 1040 U.S. Income Tax return

D) Estate as Designated Beneficiary

 

  1. If owner died before age 70 ½, then use 5 year rule.  Account values must be totally distributed within 5 years of death
  2. If owner died after age 70 ½, then use life expectancy rule based on remaining life expectancy of the deceased IRA owner using the Single Life RMD Table.

Technical Tax Rules for Inherited IRA Distributions

 

There are technical rules that apply to the distribution methods described above. Here is a short list of the most important rules for inhertied IRAs:

 

  • If an IRA with multiple non-spouse beneficiaries can be divided into separate accounts by September 30th of the year following the owner’s death, then the life expectancy of each beneficiary may be used for each separate share using the Single Life RMD Table
  • When an inherited IRA is received by a beneficiary at the owner’s death, for the life expectancy rule distribution method, determine the Single Life RMD Table factor and subtract 1 each year thereafter.
  • Post-death account transfers are permitted from an existing inherited IRA to a new inherited IRA with a different mutual fund custodian or annuity carrier.  The appropriate Single Life RMD Table factor is then carried over and applied to the new inherited IRA for RMD purposes
  • Inherited IRAs must be re-titled at the death of the IRA owner.  The individual Social Security number of the beneficiary or the trust Tax ID number must be provided to the IRA custodian or IRA carrier.  The account will always retain legal status as an “inherited IRA” account until it is fully distributed to the beneficiary.  The new title of the inherited account may read as follows:
    • a.  John Smith (deceased) IRA for the benefit of (fbo) Karen Smith, daughter
    • b.  John Smith (deceased) IRA for the benefit of (fbo) XYZ Bank, Trustee of the John Smith Irrevocable Trust, dated 1/1/2016.

 

BSMG can provide access to multiple annuity carriers to fund IRAs both during the lifetime of an IRA owner or as an inherited IRA after the IRA owner has died.  Contact your BSMG Annuity Advisor who will consult with BSMG Advanced Sales to design an inherited IRA plan that can be crafted to meet the needs of your best IRA clients.

 

 

Russell E. Towers JD, CLU, ChFC
Vice President — Business & Estate Planning
Brokers’ Service Marketing Group
russ@bsmg.net