RMD Conundrums

RMD Conundrums
Natalie Choate answers reader questions about calculating multiple beneficiary and 'much younger spouse' RMDs.

Natalie Choate, 12/14/2012

Required minimum distributions (RMDs) look easy, but the devil is in the details, as shown by two recent questions from practitioners.
One pertains to IRAs inherited by multiple beneficiaries, the other pertains to computing lifetime RMDs under the "much-younger spouse method."

Question: Can we "mix and match" IRAs for RMD purposes post-death? I know that a retiree who owns multiple IRAs can take his annual required minimum distribution (RMD) for all of the accounts from any one or more of them. He does not have to take each particular IRA's RMD from that particular IRA. Does this rule continue to apply after death? Our client died in 2012 before taking his 2012 RMD. We know the beneficiaries must take the 2012 RMD for the year of death to the extent the decedent had failed to take it
prior to death. But which beneficiary (or beneficiaries) must take the RMD from which IRA? Can the beneficiaries "mix and match" with their inherited IRAs the way the decedent could have done during his lifetime?
Answer: Go slow on this one! There are several possible permutations, and they don't all have the same answer:
Situation No. 1: Dad has two IRAs. He leaves one IRA to his surviving spouse and one to his daughter. While living, Dad could have taken his 2012 RMD for both of these accounts out of either one of them. But he dies in 2012 before taking the RMD. Daughter must take the RMD for the IRA that is payable to daughter from the IRA that is payable to daughter. Spouse must take the RMD for the IRA that is payable to spouse from the IRA that is payable to spouse.
There is no authority that I'm aware of for treating these separate accounts as a single account, and there is no authority for one beneficiary to "get credit" for another beneficiary's distribution (except possibly in the case of a single account, see Situation No. 2).
Situation No. 2: Dad has two IRAs. He leaves both IRAs to his daughter. While living, Dad could have taken his 2012 RMD for both of these accounts out of either one of them. He dies in 2012 before taking the RMD. The regulation allows a beneficiary who inherits multiple IRAs from one decedent to take the RMD for any one of them out of any one of them. Daughter owns both of Dad's former IRAs, and they both came from the same decedent, so she can take the RMD for either of them from the other one and vice versa. This
might be called the "same beneficiary/same decedent" rule.
Situation No. 3: Mom dies in 2012, leaving a single large IRA. She had not taken the 2012 RMD of $10,000 at the time of her death. The beneficiary designation reads, "Upon my death pay $50,000 to charity, and pay the balance to my son Junior." The charity takes its $50,000 share in full in 2012. Since that $50,000 distribution is more than the 2012 RMD ($10,000), in my opinion, Junior does not need to take any additional distribution in 2012. The 2012 distribution requirement has been satisfied. The regulation provides that the doctrine of "separate accounts" (whereby multiple beneficiaries of an inherited IRA can split it up and treat their separate shares as separate inherited IRAs) does not and cannot apply in the year of death. The regulation says that a single account payable to multiple beneficiaries must be treated as a single account in the year of death. Therefore, according to my reading, a payment of the required distribution amount to any one beneficiary satisfies the requirement for all of them. However, I have heard that not all IRA providers agree with this. Some IRA providers require each beneficiary to take his, her, or its pro rata share of the RMD even for the year of death.

Question: An IRA owner has reached his required beginning date. The beneficiary of the IRA is a "conduit trust" for the benefit of his spouse, who is more than 10 years younger than IRA owner. If she were named outright as beneficiary, the IRA owner could use the "Joint and Survivor Life Table" to compute his RMDs, rather than the "Uniform Lifetime Table" the rest of us have to use. Is it still possible to use the Joint and Last Survivor Table when the beneficiary is a trust for the spouse rather than the spouse individually?
Answer: Yes, it is possible. The trust must be one under which the spouse is considered the "sole beneficiary" for minimum distribution purposes. For example, a "conduit trust," which is a trust under which the surviving spouse will be entitled (after the participant's death) to receive from the trust, outright and free of trust, all distributions the trust takes out of the retirement plan. If the trust for the spouse is a conduit trust, then you can compute RMDs as if the spouse herself were the beneficiary, provided that the participant
provides a copy of the trust to the plan administrator. This situation is specifically discussed and "blessed" in the IRS regulations. See Reg. § 1.401(a)(9)-4, A-6(a). Of course the trust and/or spouse would have to be the beneficiary of the IRA as of Jan. 1 of the applicable distribution year and not be removed as beneficiary during the rest of the year (other than by death or divorce).

Poverty: Let's Do Something About It

Poverty...let’s do something about it                                 Holiday Season 2012          

Forty-six million Americans, the most since the Great Depression, are considered poor, thanks in large part to crippling economic policies. There is something wrong when 40% of children born to parents in the lowest fifth of earners never know anything better.

Government's approach has been to spend lots of money on bureaucratic, top-down, anti-poverty programs. Starting in the 1960s, this top-down approach created and perpetuated a debilitating culture of dependency, wrecking families and communities. We need a balance that allows government to act for the common good, while leaving private groups free to do the work that only they can do.

Loaves and Fishes of Contra Costa (“Loaves & Fishes”), a local nonprofit whose mission is to feed the hungry, has been in operations since 1983.  It started with 2 Contra Costans serving sandwiches out of the back of their car after witnessing a family collecting food out of a dumpster.  The need is serious: 25 percent of families with children in Contra Costa experience hunger at some point each year and 15 percent of Contra Costans live below the poverty line.

This past year Loaves & Fishes served over 171,000 hot meals and distributed over 60 tons of groceries from its five dining rooms in Martinez, Pittsburg, Antioch, Bay Point and Oakley.  Its clients represent a cross-section of Contra Costa: the home owner, the homeless, the employed, the unemployed and the under-employed, families with children, veterans, the old and the young.  No one is turned away, all are welcomed.

Loaves & Fishes partners with other community based organizations to provide access to services that can help their guests cope with the challenges they face.  For example, 

(1) they partner with the Food Bank of Contra Costa and Solano to add fresh produce to its Friday food pantry program to improve the nutritional quality of the food that their guests have for the weekend;

(2) they invite Opportunity Junction, a local non-profit that offers a job training program, to recruit trainees from its dining rooms;

(3) they work with HICAP, a local non-profit, to help counsel seniors on navigating the complex world of Medicare and Medicaid;

(4) they partner with the Food Bank to sign up eligible clients for CalFresh (federally funded food stamps); and

(5) they provide job postings and other leads for services that would help their clients improve their ability to maintain their independence.

Loaves & Fishes is committed to doing what it can to assist its clients in their fight for self-sufficiency.  Providing a hot meal does much more than satisfy an immediate need; it allows people to use the limited money they have to pay for other basic needs such as rent, utilities, clothes, gas and prescriptions.  This allows them to stay independent. Without this support many of them would be homeless.

Please visit the Loaves & Fishes website: www.loavesfishescc.org to learn more about their efforts to help the less fortunate. When you consider your charitable gifts for 2012 please include Loaves & Fishes.