Inherited IRA where decedent passed away after 12/31/2019
I have a client who passed away in April 2020. My understanding over the last 18 months is that the beneficiaries have until December 31, 2030 (12/31 of the 10th anniversary after death) to make all the distributions. I have also thought that the beneficiaries don’t have an annual minimum distribution as they did under the old rules. Is this correct? The custodian was telling me they have to take money out this year,
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Permalink Submitted by Alan - IRA critic on Mon, 2021-10-18 18:21
The custodian is incorrect unless one or more beneficiaries is an eligible designated beneficiary. If not, the 10 year rule applies according to your original understanding. The confusion with the custodian is due to the IRS originally issuing a Pub 590 B in the spring that stated annual RMDs were required within the 10 year rule period. This shocked everyone, and the IRS immediately revised Pub 590 B to remove the annual RMDs. There are no annual RMDs within the 10 year rule. The only RMD is in year 10 for any remaining balance in the inherited IRA.
Permalink Submitted by Robert Roselli on Mon, 2021-10-18 18:53
1) you mentioned unless one of more beneficiaries is an eligible designated beneficiary. What does that mean?2) The decedent passed in 2020. His IRA went to an Inherited IRA trust and Inherited IRA estate. We are just splitting the accounts now. Because the accounts are just being settled in 2021, we won’t have an RMD for this year correct? I know there are none until 2030, but we usually have to take out any remaining RMD’s the year the decedent passed away. Since this straddled over to another year, I just want to make sure no RMD’s this year.
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-18 19:35
There was no year of death RMD for 2020, since all 2020 RMDs were waived. However, it is very rare for part of an IRA to be left to the estate or have no beneficiary, and the rest to a trust. This could result in two different beneficiary RMD requirements. How old was the decedent in 2020?
Any portion left to the estate will either be subject to the 5 year rule (if decedent passed prior to RBD) or the remaining LE of the decedent if decedent passed after the RBD. The 10 year rule would not apply in either case.
Any portion left to a non qualified trust would have the same RMDs as the estate above. But if the trust is qualified for look through as most are, the 10 year rule would apply to that portion of the IRA.
For either 10 or 5 year RMD requirements, there are no annual RMDs, just total distribution by 10 or 5 years respectively.
An eligible designated beneficiary (EDB), would be an individually named beneficiary who is a spouse, not more than 10 years younger than decedent, decedent’s minor child, or a disabled beneficiary. EDBs can still use their life expectancy for RMDs.
With more detail about the IRA, age at death, and the beneficiary (estate or trust) info, we could narrow this down.
Permalink Submitted by Robert Roselli on Mon, 2021-10-18 19:49
The decedent was 87 at death. For the estate Inherited IRA, we are using an estate bypass so the Inherited IRAs will be in the name of the beneficiaries with their social security numbers. he had 210,000 in IRAs with no living beneficiaries so it went to the estate, but the custodian is allowing us to do a bypass of the estate. I believe this is going to be as if he left the IRA directly to them. He had a large IRA where he named his trust as the beneficiary. The trust specifically calls for exempt shares to be created for his beneficiaries. The beneficiaries are his two sons and his grandson. I believe we are set for the INh IRA – trust. I created 3 separate shares and the beneficiaries have to take the whole account by 2030.
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-18 20:34
If bypassing the estate you are referring to the common practice of the executor assigning the IRA out of the estate to individual inherited IRAs for each estate beneficiary, this does not change the RMD required since the estate is still treated as the actual beneficiary for RMD purposes. For the age 87 decedent that would result in life expectancy RMDs for the beneficiaries based on the decedent’s age. The divisors would be 5.7 for the 2021 RMD, 5.1 for 2022 due to new 2022 RMD tables, then reducing by 1.0 each year after that. Account would be drained by 2027.
If the large separate IRA was left to a qualified trust, then you are correct about the 10 year rule applying for distributions to the trust or to any separate inherited IRAs assigned out of the trust to the trust beneficiaries. This would result in no annual RMDs required, but all inherited IRAs drained by 12/31/2030.
Since the estate inherited IRA and the qualified trust inherited IRA will have different RMDs, the inherited IRAs from each should be kept separate, in other words, each individual beneficiary would have 2 inherited IRAs subject to different RMD requirements.
For the trust to be qualified for look through, the trust info must be provided to the IRA custodian by 10/31/2021 (13 days from now). If not, the trust would not be qualified for look through and a non qualified trust would be treated like an estate. In that situation the inherited IRAs could be combined because they would both have RMDs based on decedent’s LE – RMD divisors as posted above.
Permalink Submitted by Robert Roselli on Thu, 2021-10-21 12:25
I wasn’t aware of the 10/31/2021 deadline. Is 10/31 the deadline every year? When I was asking the custodian how to handle the splitting of the estate, they requested the entire trust not just the title and signature pages, so I think I am good.
Permalink Submitted by Robert Roselli on Thu, 2021-10-21 12:35
Sorry to be a pain. Where are you getting the factor of 5.7 and 5.2?
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-21 15:11
The 10/31 deadline (known as the “Halloween rule”) is only for the year following death to provide the trust information to the custodian. The custodian will only need parts of the trust. See the first paragraph on p 14 of Pub 590 B.
For the estate inherited account, the divisors for deaths after the RBD are based on the decedent’s age in the year of death. I assumed 87, but if decedent would have been 88 by the end of 2020, the divisor would be different. Using 87, start with the table I divisor for age 87, which is 6.7 but there is no beneficiary RMD for 2020. Since the first beneficiary RMD will be in 2021, reduce the 6.7 by 1 to 5.7 for 2021. In the usual case, that divisor would just be reduced by 1.0 for every year thereafter, but 2022 happens to arrive with new IRS RMD tables. For 2022, the beneficiary RMD must be reset. New divisor for 2020 would have been 7.1, then two years later for the 2022 RMD that divisor is reduced by 1.0 each year, therefore 5.1 would be the 2022 divisor. 2023 will be 4.1 etc.