On Apr 17, 2002, the
IRS issued final regulations on
required minimum distributions (RMD). One of the provisions made changes to the way in which distributions for multiple beneficiaries are calculated after the death of the retirement-account owner. If the beneficiaries take certain actions by Sept 30 of the year following the year the retirement-account owner dies, the youngest of multiple beneficiaries is allowed to be the designated beneficiary. This means that, for calculating post-death
distributions, the life expectancy of the youngest instead of oldest beneficiary is used.
Determining the Designated Beneficiary
The designated beneficiary is determined solely for the purpose of calculating post-death distributions. This determination, which may occur after the retirement account owner dies, is important only if the retirement-account owner designated more than one beneficiary of his or her retirement account. The individual who is determined to be the designated beneficiary must be one of the multiple beneficiaries at the time of the retirement account owner's death.
Generally, if there is more than one designated beneficiary for a retirement account, the shortest of the life expectancies of the beneficiaries must be used to determine post-death distributions. This can be disadvantageous for an individual who is significantly younger than the other beneficiaries, or if an individual is the only person of the group of beneficiaries. (The other beneficiaries would then be non-person entities, such as charities.) An individual in either of these situations may be forced to take distributions over a much shorter period than would be allowed had he or she been the only primary beneficiary. These disadvantages, however, can be circumvented if, before Sept 30 of the year following the death of the retirement-account owner, the older and/or non-person beneficiaries take one of the following actions:
- Take a full distribution of their portion of the inherited assets.
- Properly disclaim their portion of the inherited assets.
Note: A disclaimer of inherited assets must meet certain federal and state requirements. For more information on disclaimers, refer to
Disclaiming Inherited Retirement Assets.
Illustrating the Rules
The following examples demonstrate the rules for the distributions of multiple beneficiaries:
Example 1
John died in 2002 at age 65, and the beneficiaries of his IRA - which is valued at $1 million - are his favorite charity and his 45-year-old son, Tim. Both beneficiaries, the charity and Tim, were designated to receive 50% of the IRA account. Because John died before the required beginning date (RBD) and one of his beneficiaries is a non-person (the charity), the $1 million must be fully distributed by Dec 31, 2007, which is the fifth year following the year John died.
Had Tim been the only beneficiary of the IRA, he would have been allowed to do one of the following:
- Distribute the amount within the five-year period stated above.
- Stretch distributions over his life expectancy. Since Tim reaches age 46 in 2003, his life expectancy is 37.9 years. (Refer to the IRS "Single Life Expectancy Table" in IRS Publication 590.)
Since Tim is not the only beneficiary, he does not have these two choices. But all is not lost for Tim. He may still be treated as the sole primary beneficiary, for purposes of using his life expectancy, if the charity does either of the following:
- Takes a full distribution of its half by Sept 30, 2003.
- Properly disclaims its half by Sept 30, 2003.
Tim may ask the charity to take either of these actions, so that he is allowed to benefit from using his life expectancy. |
Example 2
The facts are the same as in example 1 except that John died at age 74. Because John died after the RBD and one of his primary beneficiaries is a non-person, post-death distributions must be taken over John's remaining life expectancy. These distributions must begin in 2003, at which time John's remaining life expectancy is 13.4 years. Tim is allowed to take distributions over his life expectancy of 37.9 years if the charity takes either of the following actions:
- Takes a full distribution of its half by Sept 30, 2003.
- Properly disclaims its half by Sept 30, 2003.
|
Example 3
Jake died in 2002 at age 75, leaving his three children and his spouse Mary as his IRA beneficiaries. The ages of the children in 2003 are 30, 40 and 45. Mary's age in 2003 is 60. Each beneficiary must receive distributions over Mary's life expectancy of 25.2 years. However, the child who is age 30 may use his or her life expectancy of 53.3 years to calculate post-death distributions if Mary and the children who are ages 40 and 45 does either of the following:
- Take a full distribution of their portions by Sept 30, 2003.
- Properly disclaim their portions by Sept 30, 2003.
If, however, no action is taken by Sept 30, each beneficiary may use his or her own life expectancy for tax years beginning 2004 if each of their portions are allocated to separated accounts by Dec 31, 2003. |
Conclusion If you are one of multiple beneficiaries, be sure to take the necessary steps to ensure maximum benefit. If your distributions depend on what the other beneficiaries do by the Sept 30 deadline, do be aware that these other beneficiaries may not be willing to take a full distribution of their amounts, as it may mean paying taxes on the amount for the year the distribution occurs. On the other hand, if their portions are insignificant amounts or they are charities of non-profit organizations that do not pay income tax, they may be accommodating.
Be sure to consult with a competent tax professional before you make any decisions about your retirement assets, including those you inherit.
by Denise Appleby (Contact Author | Biography)
Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.
