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Thursday, April 21, 2016
Inherited IRA Situation - Daughter Dies, Then Dad Dies, Then Mom Dies
Jane Martin was age 37 in 2012 when she died. At the time she had an IRA with ABC Bank with a balance of $70,000. Her IRA account balance was due to a 401(k) rollover made in 2008 plus she had made a number of annual contributions. She had designated her dad, Tom Doe, to receive 50% of her IRA and her mom, Karen Doe, to receive the other 50%. Tom’s date of birth was June 10, 1944 and Karen Doe’s date of birth was December 15, 1950.
ABC Bank established on its computer systems two inherited IRA as follows: (“Tom Doe as beneficiary of Jane Martin’s traditional IRA”) and (“Karen Doe as beneficiary of Jane Martin’s traditional IRA.’)’
Tom designated his wife, Jane, to be the beneficiary of his inherited IRA (“Tom Doe as beneficiary of Jane Martin’s traditional IRA”) and she designated Tom to be the beneficiary of her inherited IRA (“Karen Doe as beneficiary of Jane Martin’s traditional IRA”).
With respect to Tom’s inherited IRA, required distributions were made to him for 2013, 2014 and 2015. Tom recently died on March 13, 2016. He had not taken his 2016 RMD prior to his death.
Since he was age 69 in 2013, the initial divisor for the RMD calculation for his inherited IRA was 17.8 and the schedule to be used was:
2016 Tom died 14.8
With respect to Karen’s inherited IRA, required distributions were made to Karen for 2013, 2014 and 2015. Since she was age 63 in 2013, the initial divisor for the RMD calculation for her inherited IRA was 22.7 and the schedule to be used was:
With Tom’s passing, Karen now has two inherited IRAs. The one she inherited from her daughter (“Karen Doe as beneficiary of Jane Martin’s traditional IRA”) and the one she inherited from Tom. Although we at CWF have some doubts, the IRS instructions are to title this inherited IRA, “Karen Doe as beneficiary of Tom Doe’s IRA.”
Technically, these two inherited IRAs are not like-kind IRAs for purposes of applying the RMD aggregation rule since the IRAs were inherited from different people.
What RMDs need to be distributed for 2016 to Karen? She needs to be paid Tom’s RMD as calculated for her second inherited IRA as he had not taken it and she will need to take the RMD as calculated for her first inherited IRA (“Karen Doe as beneficiary of Jane Martin’s traditional IRA”)
What about the RMDs for 2017 and subsequent years? The most conservative approach for Karen is to continue to maintain two separate inherited IRAs and to take two required distributions. She would wish to designate a “new” beneficiary for each inherited IRA. As Jane had a brother, Mark Doe, Karen now designates Mark to be the beneficiary of these two inherited IRAs.
From a practical standpoint, Karen may wish to maintain only one inherited IRA. She would combine the two inherited IRAs since both had originated from her daughter’s IRA. The title should be, (“Karen Doe as beneficiary of Tom Doe’s IRA.”) The use of only one of the RMD schedules (the one requiring the larger distribution) would mean she would be withdrawing more than her true RMD amounts, but she may find maintaining only one inherited IRA worthwhile.
Upon Karen’s death, the new inherited IRA would be titled, (“Mark Doe as beneficiary of Karen Doe’s inherited IRA.”) Mark would continue use the divisor schedule being used by Karen. Current rules require the RMD divisor schedule applying to the “first” beneficiary will apply to all subsequent beneficiaries. There is no recalculation for any subsequent beneficiary.