Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

interest beneficiaries remain as beneficiaries on the Beneficiary Finalization Date, then this requirement for establishing separate accounts is met. E. If beneficiaries inherit through a trust or estate. Multiple beneficiaries who inherit their shares of an IRA through a trust or estate can establish separate accounts for their respective shares for all RMD purposes except determination of the ADP. See ¶ 6.3.02 . F. When the separate accounts become effective. The division of a single account into separate accounts is generally effective for RMD purposes beginning with the year after the year in which the division occurs, and for subsequent years. However, if the separate accounts are established either in the year of the participant’s death or in the following year, the division will be effective for purposes of calculating RMDs beginning with the year after the year of the participant’s death. Reg. § 1.401(a)(9)-8 , A-2(a)(2), first sentence. The way most often used to “establish” separate accounts in an inherited IRA is to transfer the account assets directly, via IRA-to-IRA transfer ( ¶ 2.6.07 ), from the single IRA that the deceased participant owned at his death into separate “inherited IRAs” payable to the respective beneficiaries. In the case of a typical IRA payable to, for example, “my three children A, B, and C, equally,” immediately before the participant’s death the account is titled “John Doe, IRA.” As a result of John Doe’s death, the account becomes an “inherited IRA,” titled “John Doe, deceased, IRA payable to A, B, and C, as beneficiaries” (or “A, B, and C, as beneficiaries of John Doe”). See ¶ 4.2.01 . Upon instruction from the beneficiaries, the IRA provider creates three new empty inherited IRAs, titled “John Doe, deceased, IRA payable to A [or B, or C] as beneficiary” or “A [or B, or C] as beneficiary of John Doe,” and transfers equal amounts directly into the new accounts. Separate accounts have been established. If the decedent’s account is not thus “physically” divided up, but each beneficiary’s proportionate share of all gains, losses, and expenses are appropriately tracked, that should be sufficient to constitute “establishment” of separate accounts. However, the logical conclusion of this argument would be to conclude that all fractional or percentage bequests automatically constitute separate accounts. This conclusion is supported by PLR 200121073, in which an IRA was left 45% to the surviving spouse and 55% equally to two other individuals. The account remained so titled for several years after the owner’s death, during which time the spouse’s 45% share was appropriately allocated its share of gains, losses, and expenses. The IRS ruled that the spouse was “sole beneficiary” of her 45% “separate account” in the IRA for purposes of making the election to treat that 45% share as the spouse’s own IRA ( ¶ 3.2.03 ). Another way to accomplish the objective is for the participant to divide his IRA into separate IRAs payable to the respective beneficiaries while he is still living . For example, a participant leaving his IRA partly to charity and partly to an individual beneficiary could create How do you “establish” separate accounts?