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Advisor Insights

Multiple Beneficiaries and the Year of Death RMD

Contributor Natalie Choate navigates through the complexities.

When multiple beneficiaries inherit investment retirement accounts, it can be dicey to figure out the required minimum distribution obligations.

Situation #1
Father, age 78, dies in 2019 without having taken the 2019 RMD from his IRA. We know the beneficiary(ies) of the account must take that RMD no later than Dec. 31, 2019. But which beneficiary(ies)? The beneficiary designation reads, “I leave $100,000 to My Favorite Charity, and the balance of the IRA equally to my two children.” The amount of Father’s 2019 RMD is $75,000. If the $100,000 charitable gift is distributed out of the IRA to My Favorite Charity prior to the end of 2019, is the RMD satisfied? Or does each beneficiary have to receive some part of the RMD?

For this situation, we know the answer: Paying the charity its $100,000 (or any amount equal to or greater than $75,000) satisfies the 2019 RMD in full. There is no need for each beneficiary to take a pro rata share, so the individual beneficiaries are “off the hook” for 2019.

How do we know this? Because the IRS’ minimum distribution regulations specify that an inherited IRA is treated as a single account for RMD purposes unless and until separate accounts are “established”; and the establishment of separate accounts during the year the participant died is not recognized for RMD purposes until the year after the year of death. Reg. § 1.401(a)(9)-8, A-2(a)(1), (2). If the account must be treated as a single account during the year of death, any distribution to any beneficiary counts toward the RMD requirement for that year. See also Rev. Rul. 2005-36, 2005-1 CB 1368, and Reg. § 1.401(a)(9)-5, A-4(a), third sentence.

Despite the clear language in the regulations, however, there are some IRA providers who may try to impose a pro rata distribution on the beneficiaries in this situation.

That’s the easy one. Here’s the tough one.

Situation #2
Mother, age 75, owns five separate Traditional IRA accounts. Two of them are payable to charities; the other three are payable, respectively, to her three children, Ann, Bob, and Caitlin. Her total combined RMD amount from the five accounts for the year 2019 is $234,000. In the early months of 2019, she withdrew $100,000 from one of the IRAs payable to a charity. Then she died in July 2019 before she withdrew the remaining $134,000 of her total 2019 RMD. The two charities promptly cashed out the IRAs they inherited, totaling about $2 million. The three children now want to know, with respect to the three IRAs they respectively inherited, do they need to take any RMD for the year 2019? In computing their 2019 RMDs, what credit (if any) do they get for the $100,000 Mother withdrew prior to her death, or for the $2 million that was distributed to the charities in 2019 from Mother’s other IRAs?

At first it looks like the children shouldn’t have to take ANY RMD for 2019, because with $2 million having been distributed to the charities, the amount distributed from Mother’s IRAs in 2019 vastly exceeds her $234,000 RMD. Unfortunately, it doesn’t quite work that way.

Although it’s true that Mother, during her lifetime, could (and did) take distributions from any or all of her five IRA accounts and have any such distribution count toward her combined RMD obligation with respect to all of her accounts, that option does not carry over to her beneficiaries. A beneficiary must take the RMD from and with respect to only the IRA he or she inherited. A beneficiary can “aggregate” inherited IRAs for RMD purposes only if they are inherited by the same beneficiary from the same decedent (not the case here).

When you go back to basics, you remember that each individual retirement account has its own RMD obligation. Mother owned five IRAs and left them to five different beneficiaries. While Mother was living, a distribution she took from any one of the five could satisfy her RMD obligation from any other of her accounts, but that stopped when she died.

We start by computing the 2019 separately for each of the five IRAs. Clearly the 2019 RMDs for the two IRAs passing to charity have been satisfied, since those accounts were cashed out in full in 2019. But Mother took no distributions at all in 2019 from the three IRAs that passed to her children. Thus, at least for openers, it appears that Ann, Bob, and Caitlin must each compute and take the 2019 RMD from the IRA that she or he inherited--and take that RMD by the end of 2019.

Is there any way the children can get “credit” for the fact that Mother took $100,000 of her 2019 RMD from other accounts prior to her death? There does not appear to be any mechanism for doing that--even if Mother had wanted to give the children “credit” for these distributions, there is no means (under today’s laws) for an IRA owner to specify, “If I die before taking my full RMD for the year, but I took more than required from one or more of my IRA(s), please allocate the excess RMDs from such one (or more) IRA(s) to the following other IRA(s) owned by me [insert account numbers].”

If Mother had taken her full 2019 RMD, then (regardless of which account(s) she took it from), clearly the children would not be required to take any year-of-death RMD from their inherited IRAs because (apparently) Mother would be “deemed” to have satisfied the RMD for all her accounts by means of the distributions she took from some of them. But when (as here) Mother died before satisfying the full RMD for 2019, we need to look at the RMD for each IRA, account by account, and see whether it was satisfied or not. If it wasn’t, the beneficiary is left holding the bag.