IRA-BDA in name of a Trust, RMD miscalculated? | Ed Slott and Company, LLC

IRA-BDA in name of a Trust, RMD miscalculated?

We have a client couple with a legal Trust and the husband passed away last year on 5/8/11. His IRA named the Trust as the sole beneficiary and we established an IRA-BDA account in the name of this Trust. The wife and the husband’s brother are the Trustee’s. The husband was 67 (3 weeks away from turning 68) when he passed away and the wife was 68. The attorney instructed us that RMD must be withdrawn from the IRA-BDA account prior to 12/31/11 for 2011. (Even though the husband was not of RMD age.) We calculated an RMD amount (approx. $51k gross) which was withdrawn on 11/21/11. We were working on determining the 2012 RMD amount and discovered that there was an additional 401k account the husband had. The account value was not included when we determined the 2011 RMD amount. We estimate that an additional $7k should have been withheld for 2011 RMD. Is there a way to retroactively correct this? The wife is in process right now of doing a lump sum withdrawal of $12,500 and establishing a monthly withdrawal for income. The lump and the first monthly payment will be processed prior to April 17, 2012. We used the Single Life Expectancy table with the wife’s age (68 to determine the 2011 RMD) Thank you.

The attorney was wrong. As you indicated, since the decedent had not reached his required beginning date when he passed, there was no 2011 RMD due from anyone. Perhaps the funds were needed for expenses anyway, but there was no RMD. But this distribution cannot be rolled over since no distributions to a non spouse beneficiary can be rolled over. Further, the 60 day period has elapsed. Fortuneately, the 401k was not discovered last year so no unnecessary RMD was taken out of that plan. Are there any trust beneficiaries other than the wife? Is this a qualified trust? Was the trust also named as the 401k beneficiary?

Yes, the funds were needed regardless if a(n) RMD was necessary in 2011. The 401k was comprised of two separate plans as of 12/31/10; both plans were rolled over to an IRA in 2011, prior to the husband’s death. However, the 401k statement used to obtain the 12/31/10 account balance only reported one of the 401k plans- it did not include both plans. This statement was used to determine its portion of the RMD amount that was “required” (according to the attorney, for 2011). Last fall, we had posted a couple of questions regarding this client couple- I am including the links to those posts, as the info may be helpful & answers your additional questions. A concern we have is that there is going to be a 50% penalty for the additional $7k that should have been taken for the 2011 RMD, prior to 12/31/11. I’d like to confirm if this is correct or not… since RMD was not actually required in 2011, there won’t be any penalties / fees for the second 401k plan not being included in the RMD calculation & withdrawn. The funds withdrawn in 2011 would just be considered a normal withdrawal and could have been any amount that the wife wanted. (?) Thank you for your advice on this- we really need guidance on this one.

You are correct. No RMD was required for 2011 and therefore there are no penalties for not taking a distribution from any account and neither is there a penalty due to taking what was an optional distribution. For 2012, there will be an RMD based on the age of the oldest trust beneficiary unless the provisions of the trust allow it to be terminated and the IRAs assigned to the surviving spouse if she is the only beneficiary. If that is allowed, there will be no RMD for 2012 since the wife will not have reached her required beginning date yet. It is not clear to me what the purpose of this trust was, so the trust provisions will still dictate what can be done with the IRA as well as the IRA custodian's intepretation of those provisions. If there is any reason to disagree with the custodian, the IRA can be directly transferred to another custodian who has reviewed the trust in advance and would interpret the options differently from the first custodian.

For whatever reason, the attorney doesn’t want to modify the Trust. For 2012, will RMD need to be withdrawn? The wife is the oldest beneficiary and she turns 70 ½ in Sept. 2013. Is RMD based on the Single Life table or the Uniform table? The Single Life table is not advantageous…is there any way we can use the Uniform Life table?

If the wife is the sole beneficiary of the trust (eg no remainder beneficiaries or restrictions on how much of the IRA distributions pass to the wife) and the trust is qualified for look through treatment, then there would be no RMD due until the year the husband would have reached 70.5. The wife could be treated as sole designated beneficiary. Further, when RMDs must begin, a sole spouse beneficiary of a qualified trust is allowed to "recalculate" the RMD divisor. This means that the SIngle life table is re entered each year instead of reducing the divisor by 1.0 each year. If the trust is not qualified, then the IRA has a non individual beneficiary and since the IRA owner died prior to his RBD, the 5 year rule would apply to the trust, meaning the IRA would have to be fully distributed by the end of the 5th year following the year of death. The other possibility is that the trust is qualified, BUT the wife is NOT the sole trust beneficiary. In that case, the wife's age must be used and RMDs must start by 12/31/2012. She will be 69 in 2012 and the divisor would be 17.8. Because she would not be the sole trust beneficiary, that divisor would be reduced by 1.0 each year thereafter. So this is not simple as there are 3 possibilities for RMDS depending on meeting trust qualification and if there are any other trust beneficiaries.

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