Untitled Document

April 2022

Multiple Designated Beneficiaries

The oldest beneficiary is the measuring life for purposes of determining the divisor when the life distribution rule applies. The oldest beneficiary is also the measuring life for purposes of determining when the inherited IRA must be closed. That is, by the end of the 10th calendar year following the death of the oldest beneficiary.

The IRS originally had used the description that the measuring life was the beneficiary with the shortest life expectancy. The IRS now uses the description, the oldest designated beneficiary.

There are, of course, some exceptions to this general rule. There are times when the measuring life is someone other than the oldest beneficiary.

There is an exception for a type II applicable multiple trust. This type of trust may have some beneficiaries who are disabled or chronically ill and others who are not disabled or chronically ill. The measuring life will be the oldest of the beneficiaries who are disabled or chronically ill. The other beneficiaries are not considered for purposes of determining who is the measuring life.

There is an exception when one or more minor children are a designated beneficiary as of the day the IRA owner died. Only those children who are minors are considered for purposes of determining the measuring life. The oldest minor child will be the measuring life. The non-minors are not considered for this purpose. The deadline will be: what is calendar year during which the following occurs - the date the oldest child will attain age 18 plus 10 years.

For a type II applicable multiple trust. This type of trust may have some beneficiaries who are disabled or chronically ill and others who are not disabled or chronically ill. The measuring life will be the oldest of the beneficiaries who are disabled or chronically ill. The other beneficiaries are not considered for purposes of determining who is the measuring life.

A Trust is the Beneficiary
There are different trust classifications - non-qualified, qualified, see-through, conduit, accumulation, type I applicable multi-beneficiary and type 2 applicable one which requires multi-beneficiary. The RMD rules which apply to a trust depend upon the trust’s classification.

The existing trust rules in general are continued under the proposed regulations. There are two terms describing this trust - a qualified trust and a see-through trust. After the SECURE Act the main benefit of being a see-through trust is, it is able to use the 10 year rule rather than being forced to use the 5 year rule if the IRA owner dies before their required beginning date and the trust will be able to use the 10 year rule or the duals rules if the IRA owner dies on or after their required beginning date.

Four requirements must be met to be a see-through trust:
1. The trust is valid under state law or would be but for the fact there is no corpus;
2. the trust is irrevocable or will by its terms become irrevocable upon the death of the IRA owner;
3. the beneficiaries of the trust who are beneficiaries with respect to the IRA funds are identifiable; and
4. the specified documentation requirements are satisfied.

The general rule is - a beneficiary of a see through trust is treated as a beneficiary of the IRA owner if the beneficiary is a primary beneficiary of the trust. That is, the beneficiary is entitled to receive amounts in the trust arising from the IRA and such amount is not contingent nor delayed until the death of another trust beneficiary who does not predecease the IRA owner or is not treated as having predeceased the IRA owner.

Whether any other beneficiary of that trust is treated as a beneficiary of the IRA owner, depends upon whether the trust is a conduit trust or an accumulation trust.

A conduit trust is one which requires that any IRA distribution to the trust will, upon receipt by the trustee, be paid directly to or for the benefit of certain beneficiaries. The conduit trust is not required to make an immediate total close-out distribution just because all of the trust’s specified beneficiaries have died.

In the following situation the surviving spouse beneficiary is treated as the sole primary beneficiary. The IRA owner has designated a conduit trust as his or her beneficiary. The conduit trust requires all distributions from the IRA be immediately distributed to the surviving spouse. The surviving spouse is treated as the sole beneficiary because the spouse could receive amounts that are neither contingent upon nor delayed until the death of another beneficiary. Even if IRA funds have not been totally withdrawn from the IRA and paid to the trust prior to the death of the surviving spouse, the subsequent beneficiary is NOT treated as a beneficiary for RMD purposes.

If a subsequent beneficiary’s interest is minimal or remote, that beneficiary is to be disregarded for RMD calculation purposes. A beneficiary is to be disregarded if the beneficiary could receive payments from the trust arising from the IRA only upon the death of another trust beneficiary whose sole benefit is a residual interest in the trust and that beneficiary did not predecease the IRA owner. For example, there are three beneficiaries - the surviving spouse, a brother of the IRA owner and a charity. The spouse is the primary beneficiary. The bother must survive the spouse and the IRA owner. The charity will only receive both the brother and the surviving spouse die after the IRA owner. The charity is disregarded for purposes of the RMD rules. However, if the brother could receive some amount, then the charity could not be disregarded for RMD purposes.

A residual beneficiary’s interest may be disregarded for RMD purposes if the beneficiary’ interest is minimal or remote. This will occur in the following situation. The trust requires a full distribution of the trust’s IRA funds to a person by the later of: (1) the calendar year following the year the IRA owner died and (2) the end of the 10th calendar year following the calendar year in which that specified person attains age 21 , then any other beneficiary whose sole entitlement to distributions is conditioned on the first beneficiary dying before full distribution is required is disregarded. For example, the IRA owner has a trust beneficiary. The IRA owner’s niece is the beneficiary of the trust. The trust is to terminate when the niece attains age 31 with a full distribution of all trust assets. However, should the niece die before the trust is fully distributed, then the remaining trust assets are to be paid to the IRA owner’s sibling. The sibling can be disregarded for RMD purposes. Both the niece and sibling must be considered to be a beneficiary if any of the requirements are not met. For example, the full distribution is to take place when the niece is age 35 or there is not to be a full distribution.

An accumulation trust is a see-through trust which is not a conduit trust. The accumulation trust may have multiple beneficiaries who all must be considered in determining who is the oldest beneficiary. A beneficiary of an accumulation trust is treated as a beneficiary of the IRA owner if the beneficiary has a residual interest in that part of the trust entitled to the IRA funds.
The two applicable multi-beneficiary trusts - Type I and Type II.

An applicable multi-beneficiary trust is an EDB entitled to use the life distribution rule. A trust is an applicable multi-beneficiary trust if it has more than one beneficiary, at lease one beneficiary is disabled or chronically ill and all the beneficiaries are considered when determining the distribution period.

A type I multi-beneficiary trust is where the trust terms require upon the death of the IRA owner the trust to be immediately divided into separate trusts for each beneficiary.

A type II applicable multi-beneficiary trust is one which requires that all distributions must be limited and made to the beneficiaries who are disabled or chronically ill. Once all of these individuals have died, then the remaining funds may be made to the other trust beneficiaries.

Note that the separate accounting rules will apply to the separate trusts set up under a type I multi-beneficiary trust.

The Trust Beneficiaries To Receive the IRA Funds Must Be Identifiable.

For RMD purposes the applicable distribution period will generally be determined by using the oldest designated beneficiary. There are, of course, exceptions. Who is considered when determining who is the oldest designated beneficiary?

Trust beneficiaries are identifiable with respect to an IRA owner if it is possible to identify each person who has been designated to receive a portion of the IRA funds through the trust. The IRA owner may define a class of persons to receive the IRA funds.

The fact that the IRA owner has given a third party a power of appointment does not mean the identifiable requirement cannot be met. It can still be met. The power of appointment if exercised by the September 30 of the year following the year the IRA owner died means the new beneficiaries must be considered. A power of removal if exercised by the September 30 of the year following the year the IRA owner died means a removed beneficiary no longer would be considered. If the power of appointment/removal is not exercised then original beneficiaries must be considered.

If a beneficiary is added after September 30, the distribution period might have to change. A determination how and if the addition of the new beneficiary requires a change in the RMD distribution period must be made. If the addition of a certain beneficiary would require a full distribution by the trust, then the full distribution is not required until December 31 of the year following the addition of the beneficiary.

Example #1. The trust is an accumulation trust. The primary beneficiary of the trust is the spouse of the deceased IRA owner. The spouse has a power of appointment with respect to the portion of the IRA funds not distributed prior to his or her death. If the spouse fails to exercise the appointment by the applicable September 30, then those funds are to go to the IRA owner’s child. In this situation both the spouse and the child are considered to determine the applicable RMD distribution period.

Example #2. Same as Example #1, except that after September 30, the spouse exercises her power of appointment and she designates her sibling to be the subsequent beneficiary. All three must be taken into account when applying the rules for multiple beneficiaries for each calendar year after the sibling is added as a beneficiary.

The fact that a see-through trust is modified after the IRA owner has died does not necessarily mean that the trust beneficiaries are not identifiable. If state law permits the trust terms may be modified after the grantor’s death then there could be a change in beneficiaries of the trust. If the change is made by the following September 30, the change is effective whether the change is the addition of a new beneficiary or the removal of an existing beneficiary. If the change is not made by the following September 30, then the same rules applying to when a beneficiary is added pursuant to a power of appointment would apply to this situation.

Which Beneficiaries Are to be Considered For Purposes of the RMD Rules?
The general rule is - a beneficiary will be considered to be a beneficiary of the IRA owner if he or she is a beneficiary as of the IRA owner’s date of death and remains a beneficiary as of September 30 of the year following the death of the IRA owner.

The following persons are defined to not be a qualifying beneficiary if any of the following events occur by September 30 of the year following the death of the IRA owner:
1. the beneficiary predeceased the IRA owner;
2. the beneficiary is considered to have died before the IRA owner because of a simultaneous death provision or the execution of a qualified disclaimer, or.
3. the beneficiary receives the entire benefit to which he or she is entitled.

What are the separate accounting requirements and why are they important?
The requirement that the oldest multiple beneficiary must be the measuring life does not apply when the separate account rules are met. A beneficiary is able to have a separate RMD calculation independent of the calculations for the other beneficiaries.
1. The separate inherited IRAs must be set up by December 31 of the year following the year of the IRA Owner;s death;
2. A separate RMD calculation for each beneficiary is permitted starting with the year after the separate inherited IRAs are established;
3. The general rule is that the separate accounting rules do not apply to a trust beneficiary. However, there are special rules for a type I applicable multi-beneficiary trust. First, there must be a separate accounting of post-death distributions to each applicable beneficiary. Second, there must be separate accounting for allocating post death investment gains and losses. There can be separate investments, but this is not required.

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