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RMD Conundrums

Natalie Choate answers reader questions about calculating multiple beneficiary and 'much younger spouse' RMDs.

Natalie Choate, 12/14/2012

Required minimum distributions (RMDs) look easy, but the devil is in the details, as shown by two recent questions from practitioners. One pertains to IRAs inherited by multiple beneficiaries, the other pertains to computing lifetime RMDs under the "much-younger-spouse method."

Question: Can we "mix and match" IRAs for RMD purposes post-death? I know that a retiree who owns multiple IRAs can take his annual required minimum distribution (RMD) for all of the accounts from any one or more of them. He does not have to take each particular IRA's RMD from that particular IRA. Does this rule continue to apply after death? Our client died in 2012 before taking his 2012 RMD. We know the beneficiaries must take the 2012 RMD for the year of death to the extent the decedent had failed to take it prior to death. But which beneficiary (or beneficiaries) must take the RMD from which IRA? Can the beneficiaries "mix and match" with their inherited IRAs the way the decedent could have done during his lifetime?

Answer: Go slow on this one! There are several possible permutations, and they don't all have the same answer:

Situation No. 1: Dad has two IRAs. He leaves one IRA to his surviving spouse and one to his daughter. While living, Dad could have taken his 2012 RMD for both of these accounts out of either one of them. But he dies in 2012 before taking the RMD. Daughter must take the RMD for the IRA that is payable to daughter from the IRA that is payable to daughter. Spouse must take the RMD for the IRA that is payable to spouse from the IRA that is payable to spouse.

There is no authority that I'm aware of for treating these separate accounts as a single account, and there is no authority for one beneficiary to "get credit" for another beneficiary's distribution (except possibly in the case of a single account, see Situation No. 2).

Situation No. 2: Dad has two IRAs. He leaves both IRAs to his daughter. While living, Dad could have taken his 2012 RMD for both of these accounts out of either one of them. He dies in 2012 before taking the RMD. The regulation allows a beneficiary who inherits multiple IRAs from one decedent to take the RMD for any one of them out of any one of them. Daughter owns both of Dad's former IRAs, and they both came from the same decedent, so she can take the RMD for either of them from the other one and vice versa. This might be called the "same beneficiary/same decedent" rule.

Situation No. 3: Mom dies in 2012, leaving a single large IRA. She had not taken the 2012 RMD of $10,000 at the time of her death. The beneficiary designation reads, "Upon my death pay $50,000 to charity, and pay the balance to my son Junior." The charity takes its $50,000 share in full in 2012. Since that $50,000 distribution is more than the 2012 RMD ($10,000), in my opinion, Junior does not need to take any additional distribution in 2012. The 2012 distribution requirement has been satisfied. The regulation provides that the doctrine of "separate accounts" (whereby multiple beneficiaries of an inherited IRA can split it up and treat their separate shares as separate inherited IRAs) does not and cannot apply in the year of death. The regulation says that a single account payable to multiple beneficiaries must be treated as a single account in the year of death. Therefore, according to my reading, a payment of the required distribution amount to any one beneficiary satisfies the requirement for all of them. However, I have heard that not all IRA providers agree with this. Some IRA providers require each beneficiary to take his, her, or its pro rata share of the RMD even for the year of death.

Question: An IRA owner has reached his required beginning date. The beneficiary of the IRA is a "conduit trust" for the benefit of his spouse, who is more than 10 years younger than IRA owner. If she were named outright as beneficiary, the IRA owner could use the "Joint and Survivor Life Table" to compute his RMDs, rather than the "Uniform Lifetime Table" the rest of us have to use. Is it still possible to use the Joint and Last Survivor Table when the beneficiary is a trust for the spouse rather than the spouse individually?

Answer: Yes, it is possible. The trust must be one under which the spouse is considered the "sole beneficiary" for minimum distribution purposes. For example, a "conduit trust," which is a trust under which the surviving spouse will be entitled (after the participant's death) to receive from the trust, outright and free of trust, all distributions the trust takes out of the retirement plan. If the trust for the spouse is a conduit trust, then you can compute RMDs as if the spouse herself were the beneficiary, provided that the participant provides a copy of the trust to the plan administrator. This situation is specifically discussed and "blessed" in the IRS regulations. See Reg. § 1.401(a)(9)‑4, A‑6(a). Of course the trust and/or spouse would have to be the beneficiary of the IRA as of Jan. 1 of the applicable distribution year and not be removed as beneficiary during the rest of the year (other than by death or divorce).

What do practitioners say about Natalie Choate's book Life and Death Planning for Retirement Benefits (7th ed. 2011)? "I sleep with your book under my pillow." "We regard your book as the ultimate authority." "I wish more people wrote books the way you do." "Your book has been a tremendously valuable resource to our firm." "I have found this book extremely helpful." "We have read and used it in many cases already." "It's paid for itself already." "I ordered these for our company last week, and everyone loves it!" "GREAT BOOK!" To find out why your colleagues (and competitors) are raving about Life and Death Planning for Retirement Benefits, visit http://www.ataxplan.com.

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Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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