Trust RMDs After a Spouse Dies

by Natalie Choate  
12/2013

There is probably no such thing as a simple question regarding minimum distributions.
 

This reader illustrates how there is probably no such thing as a simple question regarding minimum distributions. Rarely do I answer "yes" or "no." More often the answer is, "It depends!"

Question: The IRA owner or participant ("Husband") died in 2007. His IRA was payable to a trust. The trust was a qualifying "see-through trust" under the IRS' minimum distribution regulations. Husband's surviving spouse ("Spouse") was the sole beneficiary of the trust. Required minimum distributions (RMDs) have been computed based on Spouse's life expectancy as the oldest trust beneficiary. Spouse died in 2013. Upon her death, the trust is to terminate and be distributed outright to the couple's four children. Do we continue to calculate RMDs based on the Spouse's life expectancy, or do we now switch over to the oldest child's life expectancy?

Answer: First we have a terminology issue. When you say Spouse was the "sole beneficiary" of the trust, do you mean the trust was a conduit trust? Or do you merely mean that she was the sole life beneficiary? The trust was a "conduit trust" if the trustee was required to transmit to Spouse, upon receipt, all distributions the trustee received from the IRA during Spouse's lifetime (minus applicable expenses).

If the trustee had the power to "accumulate" (not immediately distribute to Spouse) any distributions the trust received from the IRA during her lifetime, then the trust was an "accumulation trust," not a "conduit trust." Either type can qualify as a "see-through trust" for minimum distribution purposes, but the answer to your question could be different depending on which type it was.

Now to your question. The basic answer is, you NEVER "flip" over to someone else's life expectancy just because a trust beneficiary dies. The death of a beneficiary (in your case, Spouse) after the participant has died has basically NO EFFECT on the Applicable Distribution Period (ADP).

The "Applicable Distribution Period" (ADP) for an IRA is "carved in stone" once the participant dies. We determine who the designated beneficiary(ies) is (or are) at the moment of the participant's death, and that's it. Subsequent events (such as the death of a beneficiary or the termination of a trust) will have NO effect on the ADP. Regardless of how many deaths or trust terminations there may subsequently be, the ADP "is what it is" on the participant's death.

So basically you don't have to worry about the ADP somehow changing on Spouse's death or flipping over to the children's life expectancy--it ain't gonna happen!

Of course there are ALWAYS exceptions in the minimum distribution rules. Here are the four exceptions to the "carved in stone" rule. In these situations the stone may crumble or expand or otherwise get "uncarved":

Spousal rollover: If the benefits are payable to the surviving spouse, and he or she "rolls them over" to his or her own IRA, the ADP will thenceforth be determined based on the surviving spouse as "owner," and ceases to be governed by the rules applicable to the deceased participant's IRA. This rollover could occur at any time after the participant's death, since there is no deadline for a spousal rollover. It can even occur when the benefits are payable to an estate or a trust, if the surviving spouse has the power to take the money out of the trust. But this was not the case in your example--even if the spouse could have withdrawn the money from the IRA and the trust, she didn't do so.

Separate accounts: If the benefits are payable to multiple beneficiaries in percentage or fractional shares, the beneficiaries can divide the inherited IRA into separate inherited IRAs, one payable to each of them. If such "separate accounts" are established by Dec. 31 of the year after the year in which the participant died, then each separate account is treated as a separate inherited IRA, and the ADP for each is determined on that basis, rather than being based on, say, the life expectancy of the oldest one of the multiple beneficiaries. But this exception also doesn't apply to your situation; it can never apply when the IRA is payable to just one beneficiary (in this case a trust).

"Removing" a beneficiary by the Beneficiary Finalization Date: A person or entity who is a beneficiary of the IRA as of the date of the participant's death, but who ceases to be a beneficiary by Sept. 30 of the year after the year of the participant's death (the "Beneficiary Finalization Date" or BFD), does not count as a beneficiary for minimum distribution purposes. Typically "removal" would mean that the beneficiary either received or disclaimed all of his, her, or its share of the benefits prior to the BFD. But this exception also does not apply in your situation, where there was no change in the makeup of the beneficiaries prior to Sept. 30, 2008.

When both spouses die young: Finally, there is a quirky rule that was probably intended to help families but that usually has the opposite effect. If the participant died before age 70 1/2, leaving his IRA to his spouse as sole beneficiary, and then the spouse also later died, before the end of the year in which the decedent would have reached age 70 1/2, the Applicable Distribution Period after the spouse's death is determined "as if" the spouse were the participant! In other words, the APD will be the life expectancy of the spouse's "Designated Beneficiary," or it will be the end of the fifth year after the spouse's death if the surviving spouse did not have a Designated Beneficiary. This rule WOULD apply in your situation, IF the trust was a "conduit trust" as to the surviving spouse (so she was considered sole beneficiary of the IRA) AND both spouses died young. If the trust was an accumulation trust and/or if either spouse died after the participant's age 70 1/2 year, this exception does not apply.

If none of the above exceptions applies, then the death of the surviving spouse has no effect on the ADP of this IRA. The successor beneficiaries must continue to withdraw the benefits in annual installments over what's left of the original life expectancy of the now-deceased surviving spouse. Like I mentioned, the ADP is normally "carved in stone" when the participant dies!