INHERITED IRAs: WHAT THE PRACTITIONER MUST KNOW

By: Seymour Goldberg Goldberg & Goldberg, P.C.

445 Broad Hollow Road, Suite 25

Melville, New York 11747

(516) 222-0422

www.TrustEstateProbate.com

info.goldbergira@gmail.com

(c) Copyright 2018 by Seymour Goldberg

All rights reserved, including the right of

reproduction in whole or in part in any form.

Seymour Goldberg, CPA, MBA, JD is the senior partner in the law firm of Goldberg & Goldberg, P.C.

in Long Island, New York. He was formerly associated with the Internal Revenue Service. He conducted

many continuing education programs with the IRS and other organizations on the retirement distribution

rules. He has written two books on IRA issues for the American Bar Association which can be found in

law school libraries throughout the United States. They are Inherited IRAs, What Every Practitioner Must

Know, 2017 Edition and IRA Guide to IRS Compliance Issues, Including IRA Trust Violations, call 800-

285-2221 or visit shopaba.org for further details. He was the author of the amicus (friend of the court)

brief in the 2014 inherited IRA Supreme Court case, Clark v. Rameker.

Mr. Goldberg can be reached at 516-222-0422 or by email at info.goldbergira@gmail.com. You may

also visit his website at TrustEstateProbate.com.

INHERITED IRAs: WHAT THE PRACTITIONER MUST KNOW

Table of Contents Page No.

Overview ......................................................................................................................................... 1

Common Errors In Retirement Distribution Planning .................................................................... 2

Why Many Beneficiary Forms Are Defective ................................................................................ 5

Practical Points ................................................................................................................................ 6

How the Inherited IRA Rules Work for a Nonspouse Beneficiary ................................................. 9

Death of IRA Owner Before or After His/Her Required Beginning Date .................................... 12

How the Inherited IRA Rules Work with Multiple Nonspouse Beneficiaries .............................. 17

How the Spousal IRA Rules Work................................................................................................ 19

Use of Separate Irrevocable Spendthrift Trust as Beneficiary of an Inherited IRA

for Asset Protection Purposes........................................................................................................ 27

What You Should Know About the One-Per-Year Limit on IRA Rollovers that

You Don’t Know ........................................................................................................................... 28

APPENDIX A

LIFE EXPECTANCY TABLES ................................................................................................. A-1

APPENDIX B

Articles on Retirement Distribution Rules .................................................................................. B-1

1

Overview

Many taxpayers have accumulated a considerable amount of assets in their retirement accounts. These

assets may be in their 401(k), another type of qualified plan, a 403(b) arrangement, a 457 governmental

plan, a traditional IRA and a Roth IRA.

Often taxpayers roll over their retirement assets from an employer sponsored retirement plan into a

rollover IRA for tax planning purposes and for other reasons. These assets should be part of an overall

estate plan if they are substantial. Even if these assets are not substantial, you should know how the basic

retirement distribution rules work.

The problem with the concept of estate planning with retirement assets is the fact that many people fail

to address the issue during their lifetime. Often the taxpayer relies upon an advisor who may not know

many of the rules. In addition, the beneficiaries of an inherited IRA may want you, as a practitioner, to

advise them as to the post-death retirement distribution rules as well.

The purpose of this guide is to alert you, as a practitioner, as to many of the retirement distribution rules

that you must know in order to effectively implement an estate plan that includes retirement-type assets.

A number of advisors (but not all) are trained in the area of retirement distribution planning. These rules

are important and you need to be aware of them.

This guide assumes that you, the practitioner, have a limited knowledge of the rules. Many of your clients may ask you questions about retirement distribution planning. You need to be responsive.

As any attorney who is involved in retirement distribution planning, both as an author and practitioner,

I can say that there is a lot to know and you must be alert, ask questions and keep current. Don’t assume

anything. Be careful and good luck.

2

Common Errors In Retirement Distribution Planning

In general the following common errors often take place when dealing with the retirement

distribution rules from an estate planning point of view:

• Failure to timely update and/or review your existing beneficiary forms on file with the

IRA institution and the employer sponsored retirement plan.

• Failure to periodically review your existing legal instruments to determine whether the

retirement assets are charged with an allocable portion of the estate tax upon your death

or are exonerated from the estate tax liability allocable to the retirement assets. If

exonerated, then make sure that there are sufficient other assets to pay the estate tax

allocable to the retirement assets.

• Exonerating the retirement assets from any estate tax liability will permit more tax

deferred growth of the retirement assets and tax-free growth of Roth IRAs. However, this

exoneration approach is at the expense of other beneficiaries of the estate.

• Failure to do an estimated estate tax liquidity analysis to determine the extent of your

estate tax liability and the source of payment of the estate tax liability.

• Failure of your beneficiaries to know how the inherited IRA distribution rules work

after your death.

• Failure of your surviving spouse to know about the spousal rollover rules or direct

transfer rules after your death.

• Failure of your surviving spouse to timely implement the spousal rollover rules or

direct transfer rules after your death.

• Failure to know that an unpaid required minimum distribution must be paid for the year

of death of the plan participant or IRA owner.

• Failure to know that Roth IRAs are subject to post-death required minimum distribution

rules.

• Failure to know that retirement distribution post-death payments paid to a beneficiary are generally not subject to the IRS 10 percent early distribution penalty.

• Failure to know that unpaid inherited IRAs are generally included in the gross estate of

the beneficiary for estate tax purposes when the beneficiary subsequently dies.

• Failure to know that an IRA beneficiary may timely disclaim an inherited IRA.

• Failure to know that a minor should not generally be directly designated as the beneficiary of a retirement account.

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• Failure to use the Uniform Transfers to Minors Act in a manner permitted under state law as the

beneficiary of an IRA.

• Failure to have a Power of Attorney that provides for the retirement distribution transactions

including rollovers and beneficiary designations.

• Failure of your beneficiaries to know about the separate account rule if there are multiple

beneficiaries of your retirement accounts.

• Failure to know that a rollover from a previously tax qualified plan that has not been timely

updated is not valid and subject to significant IRS penalties.

• Failure to know that a specifically designed trust may be the beneficiary of retirement assets

provided that the IRS rules are satisfied.

• Failure to know that IRS penalties apply to beneficiaries of inherited IRAs when post-death

required minimum distributions are not timely made.

• Failure to maintain paperwork on the inherited payout period for the beneficiaries.

• Failure to know that if you are the nonspouse beneficiary of multiple traditional inherited IRAs

from the same decedent, that you can calculate the required minimum distribution from each

traditional inherited IRA and then can receive the total amount from any one of the inherited

IRAs.

• Failure to know that the federal estate tax attributable to retirement accounts may be deducted

by the beneficiaries on a pro rata basis.

• Failure to know how the IRA trust works when the beneficiary of an IRA is a trust.

• Failure to know that certain IRS trust documentation requirements must be satisfied with the

IRA financial institution by no later than October 31st of the year following the IRA owner’s

death.

• Failure to know that the Pension Protection Act of 2006 permits a nonspouse beneficiary of

an eligible retirement plan to establish an inherited IRA. Certain trusts may qualify for this

relief as well. These provisions apply to nonspouse beneficiaries with respect to amounts

payable from a qualified retirement plan, governmental section 457 plan, and a 403(b) tax

sheltered annuity. If the paperwork is done correctly and spousal consent, if applicable, is

obtained, then a trust can be the beneficiary of a participant’s death benefit from an eligible

retirement plan.

According to the IRS the provision was optional under the 2006 Act and not mandatory.

However, under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) this

provision is mandatory for plan years commencing after December 31, 2009.

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• Failure to know about the One-Per-Year Limit on IRA Rollovers. See IRS Announcement 2014-

32.

• The One-Per-Year Limit in IRS Announcement 2014-32 applies to individuals. Based on the

statute IRC Section 408(d)(3), this rule applies to not only examples described in the IRS

Announcement but to surviving spouse’s of the deceased IRA owners as well. However, the

surviving spouse may not rollover a required minimum distribution applicable to the deceased

IRA owner. This would complicate the situation when the deceased IRA owner had multiple

IRAs payable to a surviving spouse and the deceased IRA owner failed to receive all of his/her

required minimum distributions prior to the year of his/her death.

• Failure to know that Roth IRA conversions can no longer be recharacterized under the Tax Cuts

and Jobs Act.

• Failure to file IRS Form 5329 with the IRS when there is a noncompliant client who has not

taken required minimum distributions.

• Failure to be aware of statute of limitations issues if IRS Form 5329 is not filed for the

noncompliant client who has not taken required minimum distributions.

• Failure to be aware of the personal liability of the fiduciary for debts to the U.S. Government

on death of IRA owner or death of IRA beneficiary if unpaid required minimum distributions

were not taken by IRA owner or the beneficiary of the inherited IRA as the case may be.

5

Why Many Beneficiary Forms Are Defective

The author became aware of the fact that many IRA beneficiary forms were incomplete or defective

in 1990. It was at a time that a CPA asked me to review an IRA beneficiary form of a major financial

institution for his client. The form provided that each child would receive 50% of the client’s IRA

account. I then looked to see what provisions were made in the IRA beneficiary form if the child

predeceased the IRA owner to make sure that the child’s issue would receive the predeceased child’s

share. I was shocked to discover that the IRA beneficiary form provided that the surviving child would

receive 100% of the IRA proceeds and that the issue of the predeceased child would be cut out. Flash

forward, the author has corrected many canned IRA beneficiary forms to date to avoid this problem.

During the last ten years or so many IRA institutions have upgraded their IRA beneficiary forms so that

the issue of a predeceased child, if any, will receive the share allocated to the predeceased child. That’s

the good news. The bad news is that there may be many IRA beneficiary forms that were executed by

the IRA owner before the revised forms came out. That means that unless the IRA owner is alert, he/she

may have the old forms on file with the IRA institution.

How could many IRA owners make such a mistake? It’s easy and here are some of the reasons:

1. Taxpayers often think that the IRA assets are disposed of by their will. That’s not true

for the most part since an IRA is a nonprobate asset and is not governed by a will. The

beneficiary designation determines who is entitled to the IRA proceeds upon the death of the

IRA owner, not the will. The exception is when there is no beneficiary designation on file with

the IRA institution or the IRA owner for whatever reason selected his/her estate as the

beneficiary of his/her IRA. In that case the IRA proceeds will generally be governed by the will

provisions unless the IRA plan document provides for default beneficiaries. If the IRA is

payable to the deceased IRA owner’s estate, then the benefits of the long-term stretch IRA

payments are generally lost.

2. It is possible that a number of IRA institutions may need to upgrade their beneficiary

forms to provide for the predeceased child situation previously discussed.

3. A number of IRA institutions have sophisticated beneficiary forms that are excellent.

The problem there is that they are so sophisticated that they are difficult for the average person

to follow.

4. Many taxpayers are intimidated by IRA beneficiary forms and they tend not to read the

fine print that is boilerplate. In essence the canned language in your IRA beneficiary form acts

as a will for your IRA assets.

6

Practical Points

1. The author uses the term “beneficiary” instead of “designated beneficiary” throughout this

guide. If the beneficiary is an individual, then the beneficiary is considered to be a “designated

beneficiary.”

2. A trust is beneficiary, not a designated beneficiary. However, if strict IRS compliance rules are

satisfied then the beneficiary of the trust is considered to be a “designated beneficiary.” If a trust is the

IRA beneficiary, then the trust should be updated, where possible, to conform with the revised state

trust accounting rule changes that were made in over 40 states. These changes are found in the revised

Uniform Principal and Income Act that has been adopted in whole or in part by many states.

3. Designated beneficiary status is necessary in order to use life expectancy payout periods under

the IRS rules.

4. An “inherited IRA” is an IRA that is payable to a nonspouse designated beneficiary. The author

uses nonspouse beneficiary instead of nonspouse designated beneficiary throughout this guide.

5. A designated beneficiary is an individual who is a beneficiary of an IRA owner’s account as of

the date of death of the IRA owner. An estate, charity or a trust is not considered a designated

beneficiary. However, as previously mentioned if a trust satisfies certain strict IRS compliance

requirements, then the beneficiary of the trust is generally considered to be a designated beneficiary.

This also assumes that the trust is worded properly.

6. According to the IRS rules, if the beneficiary survives the IRA owner and remains a beneficiary

as of September 30 of the year following the IRA owner’s year of death, then the life expectancy of

the designated beneficiary can be used in determining the required minimum distributions from the

deceased IRA owner’s account. The author refers to the period between the IRA owner’s date of death

and September 30 of the year following the IRA owner’s death as the “standard gap period.” The IRS

takes a realistic position and states that if the beneficiary of the IRA owner dies during the “standard

gap period”, then that beneficiary continues to be treated as the designated beneficiary for purposes of

determining the distribution period. The payments would then be made over the applicable distribution

period to the beneficiary’s successor-in-interest. The beneficiary’s successor-in-interest is determined

under state law.

7. An IRA that is payable to a surviving spouse is not technically an “inherited IRA” under the

IRS rules. However, it is often referred to as an “inherited IRA” by the public and practitioners.

8. Mistakes are often made in handling post-death IRA distributions. The biggest mistake is

guessing what the rules are instead of knowing what the rules are.

7

9. If you know the rules, then implement them in a timely fashion after the death of the IRA owner. Do not assume that the post-death IRA distribution rules will be automatically implemented.

Ask your advisor to make sure that the rules are actually implemented. Act promptly and follow-up.

10. If a nonspouse beneficiary is permitted to receive the deceased IRA owner’s account over a

fixed period of time under the IRS rules, then someone should prepare a letter of instruction to the

nonspouse beneficiary documenting the payout period. This is necessary since the nonspouse

beneficiary may die, become disabled or just lose track of the payout period.

11. A nonspouse beneficiary may not transfer or roll over an inherited IRA into his/her own IRA

account. This transaction is not permitted and will result in significant tax problems, penalties and

interest.

12. Many IRA owner’s who are receiving required minimum distributions die prior to the receipt

of the entire required minimum for the year of death of the IRA owner. Under the IRS rules, the IRA

owner’s beneficiary must receive the unpaid required minimum distribution that is applicable to the

deceased IRA owner for his/her year of death.

13. Many standard IRA beneficiary forms provide that if you have multiple beneficiaries of an

IRA, that if a beneficiary predeceases the IRA owner, then the surviving beneficiary or surviving

beneficiaries receive the predeceased beneficiary’s share. Therefore, IRA owners need to read the fine

print of the IRA beneficiary form. If the predeceased beneficiary has issue, then the beneficiary form

could state that the issue of the predeceased beneficiary should receive that share.

14. The point made in item 13 often applies to beneficiaries of life insurance policies as well.

15. Do not make a minor the direct beneficiary of an IRA account. That may be a costly error from

a legal point of view, since it may involve costs of a bond and involvement of the probate court. Have

the IRA payable to a specific custodian under the Uniform Transfers to Minors Act or to a trust for the

benefit of the minor if the amount involved is substantial.

16. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was

enacted on April 20, 2005 and effective on October 17, 2005. Under BAPCPA, a debtor can exempt

from his bankruptcy estate any of his “retirement funds to the extent that those funds are in a fund or

account that is exempt from taxation under Section 401, 403, 408, 408A, 414, 457 or 501(a) of the

Internal Revenue Code.” Inherited IRAs are not protected in bankruptcy proceedings under the

“retirement funds” exemption according to the unanimous opinion of the Supreme Court of the United

States. The opinion was issued on June 14, 2014 in the case entitled Clark v. Rameker.

Of particular importance are the rights of creditors of beneficiaries of inherited IRAs in non-bankruptcy

proceedings. This issue is independent from BAPCPA and instead is entirely dependent on state law

and will be the subject of developing state law. In order to protect the beneficiary of an

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inherited IRA, if that is a concern, then consider the creation of an irrevocable spendthrift trust as the

IRA beneficiary. Although the IRS sanctions revocable trusts as the IRA beneficiary, it is probably best

that an irrevocable trust be considered instead of a revocable trust for added protection. The reason for

that is because a Kansas appellate state court case held that the debts of the IRA owner can be satisfied

from a revocable trust that was the beneficiary of the IRA owner based upon Kansas state law.

17. If there is an estate tax liability attributable to an IRA and there is an issue as to whether the

IRA beneficiary will pay his/her share of the estate tax liability, then consider a trust as the IRA

beneficiary with provisions in the trust that provides for the payment of the estate tax attributable to the

IRA by the trustee.

18. Don’t assume that any one person knows all the post-death IRA distribution rules. Your advisor

must learn the rules by means of, for example, taking continuing education courses, reading materials

on retirement distribution planning, and actual experience in implementing the rules.

9

How The Inherited IRA Rules Work For A

Nonspouse Beneficiary

The concept of an inherited IRA for a nonspouse beneficiary is the ability of a nonspouse beneficiary

to receive distributions from a deceased IRA owner’s account over the life expectancy of the nonspouse

beneficiary. For purposes of this outline, a nonspouse beneficiary means an individual, not an estate or

charity. Also, an IRA trust for the benefit of a nonspouse beneficiary, if done correctly, can provide

for stretch payments for the individual beneficiary of the IRA trust.

The rules involving multiple nonspouse beneficiaries and the spousal IRA rules will be discussed in

other sections of this outline. It is important from a tax planning and estate planning point of view to

know how to implement the extended payout rules for a nonspouse beneficiary.

The rules, subject to the terms of the IRA agreement, are found in the IRS regulations and other IRS

guidance. Basically if done right, the rewards can be significant for the IRA owner’s beneficiaries. If

done incorrectly or carelessly, then the results can be financially hazardous to the IRA owner’s

beneficiaries.

Let’s hope that you can use the points described in the outline to do the right thing at the right time.

By using the examples that follow, you and your beneficiaries should realize how detailed and

straightforward the rules are. The key to the distribution rules is implementation and follow-up. Each

example will be explained in nontechnical terms to the extent that the author is able to do so. Often the

examples hit home where words fail. Where a word is underlined, it is done intentionally so that you

remember it.

Before we get started, we must go over a few important points and definitions. For example:

1. The financial institution holding the IRA may have policy rules and IRA agreements that are

more restrictive than the IRS rules.

2. The person you are dealing with at the IRA financial institution may not have much experience

in dealing with the IRA distribution rules and may handle the inherited IRA rules incorrectly.

3. The IRA account may not be large enough to warrant sophisticated tax planning techniques.

4. Often, the term “designated beneficiary” is used by the IRS and IRA institutions. A designated

beneficiary is an individual who is designated as a beneficiary under the IRA agreement. The individual

or individuals may be designated by means of a class such as all my surviving children or my issue per

stirpes. If there is no designated beneficiary, then the IRA document may possibly provide for default

designated beneficiaries. The designated beneficiary for an IRA is made on the designation of

beneficiary form supplied by the IRA institution. It can be made in another written format or

attachment as long as it is signed and dated and accepted by the IRA institution. If a community

property state is involved, then spousal consent may be required if a nonspouse beneficiary is

designated as the IRA beneficiary.

10

5. According to the IRS rules for purposes of the life expectancy payout rules, an individual must

be designated as a beneficiary as of the date of death of the IRA owner. In addition, the IRA owner’s

designated beneficiary is generally determined based on the beneficiary designated as of the date of

death of the IRA owner and who remain as a beneficiary as of September 30 of the calendar year

following the calendar year following the IRA owner’s death. However, if the designated beneficiary

dies during the period between the IRA owner’s date of death and September 30 of the year following

the year of the IRA owner’s death, then the beneficiary still continues to be treated as the designated

beneficiary for the purposes of determining the distribution period for required minimum distribution

purposes after the IRA owner’s death.

6. According to the IRS rules, an individual who is a beneficiary as of the date of the IRA owner’s

death and dies prior to September 30 of the calendar year following the calendar year of the IRA

owner’s death continues to be treated as the designated beneficiary for purposes of determining the

payout period regardless of who is the successor-in-interest to the payments under state law.

7. The term “required beginning date” basically means the date by which mandatory distributions

must commence to be paid to an IRA owner if the IRA owner is alive as of that date. The term “required

beginning date” does not apply to a Roth IRA owner or to required minimum distributions to

beneficiaries of deceased IRA accounts. However, under certain circumstances a surviving spouse may

have a “required beginning date.” This will be discussed in the spousal IRA rules section of this guide.

The term “required beginning date” for an IRA owner is April 1 of the calendar year immediately

following the calendar year in which the IRA owner attains age 701/2.

According to the IRS, an IRA owner attains age 701/2 as of the date that is six months after his/her 70th

birthday. For example, if an IRA owner’s date of birth is March 15, 1947, then the IRA owner is age

70 on March 15, 2017. The IRA owner, therefore, attains age 701/2 on September 15, 2017 and the

required beginning date for the IRA owner is April 1, 2018.

Special IRS rules apply if an IRA owner died before his/her required beginning date. Other rules apply

if the IRA owner died on or after his/her required beginning date.

The term “designated beneficiary” is an important concept because required minimum distribution

payout periods are tied into IRS life expectancy tables that are based upon the age of the designated

beneficiary calculated in the year after the IRA owner’s death.

As previously mentioned, a designated beneficiary of an IRA owner is an individual who is designated

as a beneficiary of the IRA account. It also includes an individual who is the beneficiary of a portion

of the IRA account. That individual may be a spouse or a nonspouse beneficiary. Obviously, there can

be more than one designated beneficiary of an IRA account. For example, if an IRA owner had named

his/her four children as equal beneficiaries of the IRA account, then there would be four designated

beneficiaries. Each child would be entitled to an equal portion of the IRA account on the death of the

deceased IRA owner. This assumes that they all survived the IRA owner and that there was no change

in the beneficiary selection by the IRA owner prior to his/her death. The IRA owner is free to allocate

different percentages to each child.

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If an IRA owner selects his/her estate or a charity as the beneficiary of the IRA account, then there is no designated beneficiary of the IRA owner’s account. The reason is simple, an estate or charity is not

an individual. In addition, an estate or charity has no life expectancy under the IRS rules.

For estate planning and tax planning purposes, a trust may be selected as the beneficiary of an IRA

account. A trust is considered to be a beneficiary not a designated beneficiary. However, if IRS

compliance rules and other IRS guidance rules are followed, then the individual beneficiary of the trust

is considered to be a designated beneficiary for extended payout purposes.

The author uses the term “IRA trust” whenever an IRA is payable to a trust for the benefit of an

individual beneficiary. In the author’s practice, he uses a difference dedicated IRA trust for each

individual beneficiary of the trust for practical reasons. Other practitioners may use different approaches

including using trusts under the will. The key is to follow the IRS compliance rules and other IRS

guidance as well as the revised state trust laws. Most states have completely changed the trust

accounting income and principal rules. These trust accounting income and principal changes have a

dramatic effect on trusts in general as well as IRA trusts.

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Death of IRA Owner Before or After His/Her Required Beginning Date

The following examples assume that the IRA owner died before the required beginning date under a

number of different situations:

Example 1

Assume that Marvin, an IRA owner, for whatever reason, selected his estate as the beneficiary of his

IRA account. Also assume that Marvin died on June 1, 2018 at the age of 68.

Question: By what outside date must Marvin’s estate receive the proceeds of Marvin’s IRA?

Answer: By no later than December 31, 2023.

Author’s note:

If an IRA owner dies before his/her required beginning date without having a designated beneficiary,

then a special five-year rule applies.

In Example 1, Marvin died before attaining his required beginning date without having a designated

beneficiary. Remember Marvin died at age 68. His required beginning date had he lived would have

been April 1 after attaining age 701/2. Also remember that a designated beneficiary is an individual, or

certain trusts, but not an estate.

The five-year rule works like this:

You first look at the date of death of Marvin which is June 1, 2018. You then go to the fifth

anniversary of the date of death which brings you to June 1, 2023. The IRS then allows you to go to the

end of the calendar year which contains the fifth anniversary of the date of the IRA owner’s death. This

brings you to the outside date of December 31, 2023.

Example 2

Assume the facts in Example 1 including the question and answer.

Question: What happens if Marvin’s deceased IRA account is not paid out in full by December

31, 2023?

Answer: The unpaid portion of Marvin’s deceased IRA account as of December 31, 2023 is

subject to an IRS penalty of fifty (50%) percent on the unpaid amount.

Author’s note:

If, for example, $10,000 of Marvin’s deceased IRA account was not paid out by December 31, 2023, then the IRS could impose a penalty of 50% on the shortfall of $10,000 which amounts to $5,000. This penalty may be waived by the IRS if there was a reasonable basis for the error and reasonable steps are being taken to remedy the error.

13

Example 3

Assume the facts in Example 1 including the question and answer.

Question: Must Marvin’s estate wait until December 31, 2023 to receive the proceeds of

Marvin’s deceased IRA?

Answer: No. The outside date is December 31, 2023. According to the IRS rules the proceeds

from Marvin’s deceased IRA may be received by his estate prior to that date.

Author’s note:

From a tax planning point of view, if Marvin’s deceased IRA is substantial, then the proceeds of

Marvin’s deceased IRA may be paid out at any time after his death and prior to December 31, 2023.

The accountant for Marvin’s estate should be involved in that decision. The tax deferred growth of

Marvin’s deceased IRA should be considered in the decision making process. The proceeds of Marvin’s

deceased IRA may be paid out at any time after his death and prior to December 31, 2023.

Example 4

Assume the facts in Example 1. Also assume that Marvin’s daughter, Margaret, is the sole beneficiary of Marvin’s estate.

Question: If the executor of Marvin’s estate transfers the rights to receive the proceeds of

Marvin’s deceased IRA to Margaret prior to December 31, 2023 will the transfer trigger a taxable

distribution to Margaret of Marvin’s deceased IRA?

Answer: If done correctly, then the transfer will not trigger a taxable event to Margaret.

Author’s note:

The legal representative of Marvin’s estate may prepare paperwork in order to transfer the rights to

receive distributions from Marvin’s deceased IRA to Margaret. However, the financial institution that

has the IRA may not go along with it unless certain indemnification agreements are received from

Marvin’s estate and Margaret. In the author’s practice, that procedure generally works and satisfies the

financial institution. If the financial institution refuses to cooperate, then a letter ruling from the IRS

may be necessary. However, letter rulings are both time consuming and expensive.

Example 5

Assume the facts in Example 1 except that Margaret, his daughter, was the primary beneficiary of

Marvin’s IRA account and not Marvin’s estate. Further assume that Margaret’s date of birth was

October 15, 1979.

Question: Under the IRS rules over what period of time will Margaret receive required minimum

distributions from Marvin’s deceased IRA?

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over a term-certain period of 43.6 years commencing in the calendar year 2019.

Author’s note:

According to the IRS rules, if an IRA owner dies before his/her required beginning having designated

a nonspouse beneficiary, then a life expectancy rule applies.

In Example 1, Marvin died at age 68 on June 1, 2018 before attaining his required beginning date.

However according to Example 5, Margaret was the primary beneficiary of Marvin’s IRA account.

Under the IRS rules, Margaret as a nonspouse beneficiary must first determine her attained age in the

calendar year after Marvin’s year of death. Since Marvin died in 2018, we must determine Margaret’s

age is 2019. Since Margaret’s date of birth was October 15, 1979, she attains age 40 during the calendar

year 2019. The next step is to look at the IRS Single Life Expectancy Table. This is found in the

Appendix and is referred to as Table I – Single Life Table (For Use by Beneficiaries). The life

expectancy of an individual age 40 is 43.6 years. This is the term-certain life expectancy number that

is generally locked in for the life of Margaret (until slightly increased by the IRS based upon mortality

changes years from now).

The next few examples involves an IRA owner who is receiving required minimum distributions during

his/her lifetime.

Example 6

Jack, an IRA owner, attained age 74 in the calendar year 2018. Jack’s date of birth was October 15,

1944. The beneficiary of his IRA was Jack’s estate. Jack’s IRA account balance as of December 31,

2017 is $500,000.

Question: How much is the amount of the required minimum distribution that Jack must receive

for the calendar year 2018 from his IRA?

Answer: Jack must receive $21,008.40 as the required minimum distribution from his IRA for

the calendar year 2018. This amount is determined by dividing Jack’s IRA account balance as of

December 31, 2017 by the number found in the IRS Uniform Lifetime Table that applies to Jack’s

attained age in the calendar year 2018. Jack’s IRA account balance as of December 31, 2017 of

$500,000 is divided by 23.8 ($500,000 ÷ 23.8 = $21,008.40). The number under the IRS Uniform

Lifetime Table for an individual age 74 is 23.8.

Author’s note:

The number that Jack must use in determining his required minimum distribution for the calendar year

2018 was found by looking at the IRS Uniform Life Expectancy Table. This is found in the Appendix

and is referred to as Table II – Uniform Lifetime Table. It should be noted that IRS Publication 590-B

refers to it as Table III. For convenience purposes, the author in this guide refers to it as Table II. The

Uniform Lifetime Table is for the use of:

Answer: Margaret will receive required minimum distributions from Marvin’s deceased IRA

15

• Unmarried Owners

• Married Owners Who’s Spouses Are Not More Than 10 Years Younger, and

• Married Owners Who’s Spouses Are Not the

Sole Beneficiaries of Their IRAs

Example 7

Assume the same facts in Example 6 except that Jack’s brother, Harvey, was the beneficiary of Jack’s

IRA. Harvey attained age 65 in the calendar year 2018. Harvey’s date of birth was November 1, 1953.

Questions: How much is the amount of the required minimum distribution that Jack must receive

for the calendar year 2018 from his IRA?

Answer: $21,008.40. See discussion in Example 6.

The next series of examples involves an IRA owner who received lifetime distributions and who died

on or after his/her required beginning date survived by a nonspouse beneficiary. Special IRS rules apply

if an estate is the beneficiary of an IRA owner or the nonspouse beneficiary is older than the IRA owner.

Example 8

Mary, an IRA owner, died on January 15, 2018. Her date of birth was December 1, 1938. The

beneficiary of Mary’s IRA was her daughter, Carol, whose date of birth was July 15, 1969. Assume

that Mary failed to receive her required minimum distribution of $10,000 from her IRA for the calendar

year 2018 prior to her date of death on January 15, 2018.

Question: Who must receive her required minimum distribution from Mary’s deceased IRA for

the calendar year 2018?

Answer: Carol must receive the unpaid required minimum distribution of $10,000 from Mary’s

deceased IRA account for the calendar year 2018. According to the IRS rules, the beneficiary of the

deceased IRA owner’s account must receive the unpaid required minimum distribution for the

calendar year of the IRA owner’s year of death. Carol reports the $10,000 amount in her income tax

return in the year that she receives it from Mary’s deceased IRA account. This should be 2018 if Mary

dies early in the year. If Mary died in December 2018, then Carol may not receive the $10,000 amount

until 2019. In that case Carol would report the $10,000 amount in her 2019 income tax return.

Example 9

Assume the facts in Example 8.

Question: How is the required minimum distribution from Mary’s IRA determined for the year

of her death in the calendar year 2018?

16

Answer: According to the IRS, a required minimum distribution must be made from Mary’s

IRA for the calendar year 2018 since she died on or after her required beginning date. In addition, the

IRS requires that in calculating the required minimum distribution for the calendar year of Mary’s death,

the computation is made as if Mary, the IRA owner, had lived throughout the year. The amount must

be distributed to the beneficiary to the extent that it has not already been distributed to the IRA owner

prior to the IRA owner’s date of death. Had Mary lived throughout the calendar year 2018, Mary would

have attained age 80. Therefore, the number that would be used in determining required minimum

distributions for an individual age 80 is 18.7. This number was taken from Table II – Uniform Lifetime

Table for an individual who attains age 80 in a given year. The value of Mary’s IRA as of December

31, 2017 is then divided by 18.7 to determine her required minimum distribution for the calendar year

2018.

Example 10

Assume the facts in Example 8.

Question: Over what term-certain period must Carol, as the beneficiary of Mary’s IRA, receive

required minimum distributions from Mary’s deceased IRA account?

Answer: Carol’s term-certain life expectancy period is determined in the calendar year after

Mary’s year of death and reduced by one for each year thereafter. In the calendar year 2019, Carol

attains age 50 since Carol’s date of birth was July 15, 1969. According to the IRS, a nonspouse

beneficiary must commence to receive required minimum distributions from Mary’s deceased IRA

account in the calendar year immediately following the IRA owner’s year of death. Since Carol attains

age 50 in the calendar year 2019, her term-certain period is 34.2 years. This is based upon the IRS

Single Life Table for a nonspouse beneficiary who attains age 50 in the calendar year immediately

following the IRA owner’s year of death. Carol’s required minimum distribution for the calendar year

2019 is determined by dividing Mary’s deceased IRA account balance as of December 31, 2018 by 34.2

years. After Mary’s death her deceased IRA account is retitled as follows:

Mary deceased IRA f/b/o Carol or

Carol as beneficiary of Mary’s deceased IRA

Some institutions refer to this as an inherited IRA or beneficiary IRA.

After Mary’s death Carol’s Social Security Number is used on the inherited IRA or beneficiary IRA

account.

17

How The Inherited IRA Rules Work

With Multiple Nonspouse Beneficiaries

Many of the rules in general that apply to an inherited IRA for a nonspouse beneficiary may apply to

multiple nonspouse beneficiaries of an inherited IRA. However, there are a significant number of

differences in applying the multiple nonspouse beneficiary rules. The key to the multiple nonspouse

beneficiary rule is the timely implementation of the rules after the death of the IRA owner. The timely

implementation rules apply regardless of the age of the IRA owner at the time of his or her death.

Assume that Jack, an IRA owner, died on July 1, 2018 at age 65. Further assume that the nonspouse

beneficiaries of his account were Todd, his grandson, whose date of birth is March 1, 1999, and his son,

Fred, whose date of birth is August 15, 1979. Also assume that Todd and Fred are equal beneficiaries

of Jack’s IRA account.

According to the IRS, if Jack’s deceased IRA is divided in a certain manner and by a certain date, then

each nonspouse beneficiary may then use his/her term-certain life expectancy period in determining the

required minimum distributions from his or her pro rata share of Jack’s deceased IRA account. The

separate account rule if properly and timely implemented is effective commencing in the calendar year

after the death of the IRA owner.

In the case involving Jack’s deceased IRA, it is important that Todd and Fred act timely and correctly

in order to implement the rule. The author refers to the rule as the separate account rule.

The best way to illustrate the rule is by means of several examples. These examples follow:

Example 11

Assume the facts described above that Jack, an IRA owner, died on July 1, 2018 at age 65. Further

assume that the nonspouse (equal) beneficiaries of his IRA were Todd and Fred.

Question: How is the separate account rule implemented with respect to Jack’s deceased IRA?

Answer: Both Todd and Fred must request in writing, as soon as possible, after Jack’s death

that Jack’s deceased IRA be divided into equal shares by means of a direct transfer by the financial

institution for the benefit of each of them in the manner required by the IRS.

Author’s note:

The author would have Todd and Fred send a letter to the financial institution that maintains Jack’s

deceased IRA to divide Jack’s deceased IRA equally into two Jack deceased IRA accounts by means

of a direct transfer. A nonspouse beneficiary may not roll over a deceased IRA owner’s account. Each

of Jack’s deceased IRA accounts would indicate that name and social security number of each

nonspouse beneficiary.

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Example 12

Question: How should each of Jack’s deceased IRA accounts read?

Answer: I recommend the following terminology:

Jack deceased IRA f/b/o Todd

SS # 100-00-0000

Jack deceased IRA f/b/o Fred

SS # 200-00-0000

Author’s note:

The IRS indicates that an inherited IRA must be maintained in the deceased IRA owner’s name for the

benefit of the nonspouse beneficiary.

A number of financial institutions place the beneficiary’s name first and the deceased IRA owner’s

name second. This is illustrated as follows:

Todd as beneficiary of Jack’s deceased IRA

SS # 100-00-0000

Fred as beneficiary of Jack’s deceased IRA

SS # 200-00-0000

It is common knowledge under the IRS rules that a nonspouse beneficiary of a deceased IRA owner’s

account may not roll over an inherited IRA. However, according to the IRS, a direct transfer of an

inherited IRA from one IRA financial institution to another financial institution is valid. In addition,

the same financial institution that holds the IRA may divide it as well. The key is doing it timely and

correctly.

Example 13

Question: By what date must the separate deceased IRA owner’s accounts be established in order

to take advantage of the separate life expectancy term-certain period for each nonspouse beneficiary?

Answer: According to the IRS, the deceased IRA owner’s account must be separated by no

later than December 31st of the calendar year following the IRA owner’s year of death.

Author’s note:

If the inherited IRA accounts are separated after the December 31st deadline, then each beneficiary of

each separate inherited IRA account must use the life expectancy of the oldest beneficiary in

determining required minimum distributions. In this case it would be Fred.

19

How The Spousal IRA Rules Work

Often, an IRA owner selects a spouse as the primary beneficiary of his/her IRA. There are many rules

that apply when the spouse is the beneficiary of an IRA.

While an IRA owner is alive, then the IRA owner generally uses the Uniform Lifetime Table in

determining his/her required minimum distributions from the IRA. The exception to the general rule

applies when the spouse is the sole beneficiary of the IRA account for the entire year and the spouse is

more than 10 years younger than the IRA owner. In that case, the IRS permits the IRA owner to use a

special table found in IRS Publication 590-B in order to determine the IRA owner’s required minimum

distributions. If the spouse dies or the parties are divorced in a given year, then the spouse is still

considered the sole beneficiary of the IRA owner’s account for that year even though the spouse is no

longer the sole beneficiary for that given year.

The following are a few examples of how the lifetime distribution rules work when the IRA owner has

a spouse as the primary beneficiary of the IRA owner’s account.

Example 14

Todd, an IRA owner, is age 72 in the calendar year 2018. Mary, Todd’s wife, is the sole primary

beneficiary of Todd’s IRA for the entire calendar year 2018. Mary is age 68 in the calendar year 2018.

Question: What period is used in determining Todd’s required minimum distribution for the

calendar year 2018?

Answer: The Uniform Lifetime Table must be used by Todd since Mary is not more than ten

years younger than Todd. The number that must be used by Todd who is age 72 in 2018 is 25.6 under

the IRS Uniform Lifetime Table (Table II). Therefore, Todd’s IRA account balance as of December

31, 2017 is divided by 25.6 in order to determine Todd’s required minimum distribution for 2018.

Example 15

Assume the facts in Example 14 except that Todd is age 73 in the calendar year 2019 and Mary is age

69 in the calendar year 2019.

Question: What period is used in determining Todd’s required minimum distribution for the

calendar year 2019?

Answer: The Uniform Lifetime Table must be used by Todd since Mary is not more than ten

years younger than Todd. The number that must be used by Todd, who is age 73 in 2019 is 24.7 under

the Uniform Lifetime Table. Todd’s IRA account balance as of December 31, 2018 is divided by 24.7

in order to determine Todd’s required minimum distribution for 2019.

20

Example 16

Harold, an IRA owner, is age 72 in the calendar year 2018. Carol, his wife, is the sole primary

beneficiary of Harold’s IRA for the entire calendar year 2016. Carol is age 50 in the calendar year 2018.

Question: What period is used in determining Harold’s required minimum distribution for the

calendar year 2018?

Answer: A special IRS table may be used in order to determine the number that can be used to

find Harold’s required minimum distribution for the calendar year 2018. The number is 34.9 and is

based upon the following:

(a) Carol is the sole primary beneficiary of Harold’s IRA for the entire calendar year 2018

and

(b) Carol is more than ten years older than Harold.

According to the IRS, the joint life and last survivor expectancy table found in IRS Publication 590-B

can be used. The number under this table for a 72/50 life expectancy combination is 34.9. Therefore,

Harold’s IRA account balance as of December 31, 2017 is divided by 34.9 in order to determine

Harold’s required minimum distribution for 2018.

Example 17

Assume the facts in Example 16 except that Harold is age 73 in the calendar year 2019 and Carol is age

51 in the calendar year 2019.

Question: What period is used in determining Harold’s required minimum distribution for the

calendar year 2019?

Answer: A special IRS table may be used to determine the number that can be used to find

Harold’s required minimum distribution for the calendar year 2019. The number is 34.0 and is based

upon the following:

(a) Carol is the sole beneficiary of Harold’s IRA for the entire calendar year 2019 and

(b) Carol is more than ten years younger than Harold.

According to the IRS, the joint life and last survivor expectancy table found in IRS Publication 590-B

can be used. The number for a 73/51 life expectancy combination is 34.0. Therefore, Harold’s IRA

account balance as of December 31, 2018 is divided by 34.0 in order to determine Harold’s required

minimum distribution for 2019.

21

The next series of examples involve an IRA owner who dies before his/her required beginning date and

who is survived by a spouse beneficiary of his or her IRA account. The IRS rules for a spouse beneficiary

of an IRA owner’s account, under these circumstances, are not the same as the IRS rules that apply when

a nonspouse beneficiary is involved.

Example 18

Assume that Jack, an IRA owner, died at age 60 in the calendar year 2018. Jack’s date of birth was

June 1, 1958 and his date of death was October 15, 2018. The sole primary beneficiary of his IRA

account was his wife, Jane, who survived him. Jane’s date of birth is May 1, 1963. Jane is age 55 in

2018. Jane survived Jack. The contingent beneficiary of Jack’s IRA is Harry, who is the child of the

marriage of Jack and Jane. Harry’s date of birth is May 1, 1988. He is age 30 in the calendar year 2018.

Further assume that Jack’s IRA account balance at the time of his death was approximately $600,000.

Question: Must Jane commence required minimum distributions from Jack’s deceased IRA in

the calendar year 2019?

Answer: No. Under the IRS special rules, if an IRA owner dies before the required beginning

date, then the spouse as the sole beneficiary of the IRA owner’s account has certain options. These rules

will be explained in detail as we go forward with the examples that follow. The bottom line is that Jane

is not required to commence required minimum distributions from Jack’s deceased IRA in the calendar

year 2019. See Example 20 for further information.

Example 19

Assume the facts in Example 18.

Question: In Jane’s capacity as a spouse beneficiary of Jack’s deceased IRA account, may she

withdraw any distributions that she wishes from Jack’s deceased IRA account in 2019 without any

penalty?

Answer: Yes. Jane, as a spouse beneficiary, may receive distributions from Jack’s deceased

IRA account in 2019 if she wishes. Any payments that she receives from Jack’s deceased IRA account

in her capacity as a spouse beneficiary is exempt from the IRS 10 percent early distribution penalty

regardless of her age. The exemption from the IRS 10 percent early distribution also applies even if the

beneficiary of Jack’s IRA is a minor, an estate or a trust.

Author’s note:

Jane may receive post-death distributions from Jack’s deceased IRA in 2018 as well without being

subject to the IRS 10 percent early distribution penalty.

22

Additional Author’s Note

In Gee v. Comm, 127 T.C. No. 1 (U.S. Tax Court 2006), the surviving spouse rolled over her

deceased husband’s IRA account to her own IRA account. She withdrew IRA funds from her IRA

account, which contained the rollover funds prior to age 591/2, and was held liable for a 10%

additional tax of $97,789. Had the spouse taken IRA distributions as a beneficiary of her deceased

husband’s IRA account, then the 10% additional tax would not have applied. In this case the 20

percent accuracy-related penalty was held not to apply by the court because she acted reasonably and

in good faith.

Example 20

Assume the facts in Example 18.

Question: In Jane’s capacity as a spouse beneficiary of Jack’s deceased IRA account, by what

date does Jane have to commence to receive required minimum distributions from Jack’s deceased IRA?

Answer: By December 31, 2028. According to special IRS rules, if an IRA owner dies before

the required beginning date, then the spouse as the sole beneficiary of the IRA account must commence

required minimum distributions in her capacity as a spouse beneficiary by no later than the later of:

(a) December 31st of the calendar year immediately following the calendar year in which

the IRA owner died, and;

(b) December 31st of the calendar year in which the IRA owner would have attained age

701/2 had the IRA owner not died.

Because Jack’s date of birth was June 1, 1958, he would have attained age 70 on June 1, 2028. In that

event, he would have attained age 701/2 on December 1, 2028. Therefore, Jane must commence her

required minimum distributions from Jack’s deceased IRA in her capacity as a spouse beneficiary by no

later than December 31, 2028.

Example 21

Assume the facts in Example 18.

Question: Upon Jack’s death, could Jane have rolled over or directly transferred Jack’s IRA into

an IRA established in Jane’s name?

Answer: Yes. Since Jane is a spouse, she can roll over or directly transfer Jack’s deceased

IRA into an IRA established in her name if she wishes.

Author’s note:

A surviving spouse, as the beneficiary of an IRA owner’s account, generally has the ability to roll over

or directly transfer a deceased IRA owner’s account in whole or in part into the spouse’s own IRA at

anytime or into a new IRA established in his/her own name. However, a spouse may not roll over or

23

directly transfer an unpaid required minimum distribution attributable to the deceased IRA owner into

his or her own existing IRA or to a newly established IRA in his or her own name.

Example 22

Assume the facts in Example 18.

Question: Why would Jane not wish to immediately roll over or directly transfer Jack’s deceased

IRA into an IRA maintained in her name?

Answer: Since Jane is age 55, she may wish to withdraw distributions from Jack’s deceased

IRA over the next few years without worrying about any IRS 10% early distribution penalty. This

approach allows Jane in her capacity as a beneficiary to have that option.

The next series of example involves an IRA owner who dies on or after his/her required beginning date

having selected the spouse as the primary beneficiary of the IRA account.

Example 23

Assume that Carl, an IRA owner, attains age 75 on March 15, 2018. Also assume that Margaret, his

wife, is the primary beneficiary of his IRA. Margaret attains age 72 on May 15, 2018. Also assume that

Janet, Carl and Margaret’s daughter, is the contingent beneficiary of Carl’s IRA.

Janet attains age 40 on August 1, 2018. Also assume that Carl’s required minimum distribution for the

calendar year 2018 is $30,000. Further assume that Carl died on September 15, 2018. Prior to his death,

Carl only received $10,000 of his required minimum distribution for the calendar year 2018. Further

assume that Margaret finds out about the unpaid required minimum distribution of $20,000 for the

calendar year 2018 on November 1, 2018.

Question: Who must receive the unpaid required minimum distribution for the calendar year

2018?

Answer: According to the IRS rules, the unpaid required minimum distribution of $20,000 must

be paid to Margaret as the beneficiary of Carl’s IRA. This should be done in 2018, if at all possible, to

have a clear trail.

Example 24

Assume the facts in Example 23. Also assume that Carl’s deceased IRA account at the date of his death

on September 15, 2018 is $620,000.

Question: May Margaret roll over or transfer Carl’s entire deceased IRA account into an IRA

established in Margaret’s name?

Answer: No. According to the IRS rules, Margaret may roll over or directly transfer Carl’s

deceased IRA account into an IRA in her name to the extent that it is not a required minimum

24

distribution. Therefore, Margaret may roll over or transfer Carl’s deceased IRA into an IRA in her

name to the extent it exceeds $20,000. The $20,000 amount should be received by Margaret in 2018

and reported in her income tax return for 2018. This amount cannot be rolled over or directly

transferred into her own IRA.

Example 25

Assume the facts in Example 24. Also assume that Margaret does not roll over or directly transfer

Carl’s deceased IRA, for whatever reason, into her own existing IRA or into an IRA established in

her own name. Instead, she decides to receive required minimum distributions from Carl’s deceased

IRA commencing in the calendar year 2019 in her capacity as a beneficiary. Also assume that during

2018 she received the $20,000 required minimum distribution shortfall from Carl’s deceased IRA.

Question: What life expectancy number does Margaret use in her capacity as a spouse

beneficiary in determining her required minimum distribution from Carl’s deceased IRA for the calendar

year 2019?

Answer: In the calendar year 2019 Margaret attains age 73. According to the IRS single life

expectancy table, Margaret will use a life expectancy number of 14.8. In calculating her required

minimum distribution from Carl’s IRA, Margaret must determine Carl’s deceased IRA account

balance as of December 31, 2018 and divide that amount by 14.8. The result is the required minimum

distribution that Margaret must receive from Carl’s deceased IRA for the calendar year 2019.

Example 26

Assume the same facts in Example 25.

Question: What life expectancy number does Margaret use in her capacity as a spouse

beneficiary in determining her required minimum distribution from Carl’s deceased IRA for the calendar

year 2020?

Answer: In the calendar year 2020 Margaret attains age 74. According to the IRS single life

expectancy table, Margaret will use a life expectancy number of 14.1. In calculating her required

minimum distribution from Carl’s deceased IRA, Margaret must determine Carl’s deceased IRA

account balance as of December 31, 2019 and divide that amount by 14.1. The result is the required

minimum distribution that Margaret must receive from Carl’s deceased IRA for the calendar year 2020.

Author’s note:

The IRS has special rules if the IRA owner dies on or after the required beginning date having a

spouse as the sole beneficiary of the IRA account. If that situation takes place and the surviving

spouse is the sole beneficiary, then each year the spouse beneficiary determines her age and then

looks at the IRS single life expectancy table for the number that applies to her for that year. In essence,

the IRS allows the spouse beneficiary to recalculate her life expectancy each year. This is different

from the nonspouse beneficiary rule which locks in a term-certain period determined in the year after

the IRA owner dies and reduces the term-certain period by one for each year after the initial period is

determined.

25

Example 27

Assume the facts in Example 24. Also assume that Margaret received the shortfall in Carl’s required

minimum distribution for the calendar year 2018 on November 10, 2018. Further assume that Margaret

rolled over or directly transferred the balance in Carl’s deceased IRA into an IRA established in her own

name on December 1, 2018. Margaret immediately selected Janet as the primary beneficiary of her IRA

and her niece, Jane, as the contingent beneficiary of her IRA.

Question: How does Margaret determine her required minimum distribution from her IRA for

the calendar year 2019?

Answer: Since Margaret is an IRA owner and is no longer acting in the capacity of a spouse

beneficiary of Carl’s deceased IRA, then she determines her required minimum distribution from her

IRA by using the Uniform Lifetime Table. Further, because Margaret attains age 73 in the calendar year

2019, then Margaret uses a distribution period of 24.7 in calculating her required minimum distribution

from her IRA. Margaret’s IRA account balance as of December 31, 2018 is divided by 24.7 in

determining her required distribution from her own IRA for the calendar year 2019. The result is her

required minimum distribution for the calendar year 2019. Remember that in Example 25, Margaret,

acting in the capacity of a spouse beneficiary of Carl’s deceased IRA used 14.8 in determining her

required minimum distribution from Carl’s deceased IRA. The difference of 9.9 (24.7 – 14.8 = 9.9) is

significant.

Example 28

Assume the facts in Example 27.

Question: How does Margaret determine her required minimum distribution from her IRA for

the calendar year 2020?

Answer: Since Margaret is an IRA owner and is no longer acting in the capacity of a spouse

beneficiary of Carl’s deceased IRA, then she determines her required minimum distribution from her

IRA by using the Uniform Lifetime Table. Further, because Margaret attains age 74 in the calendar year

2020, she uses a distribution period of 23.8 in calculating her required minimum distribution from her

IRA. Margaret’s IRA account balance as of December 31, 2019 is divided by 23.8 in determining her

required minimum distribution from her own IRA for the calendar year 2020. The result is the required

minimum distribution for the calendar year 2020. Remember that in Example 26, Margaret, acting in

the capacity of a beneficiary of Carl’s deceased IRA used 14.1 in determining her required minimum

distribution from Carl’s deceased IRA. The difference of 9.7 (23.8 – 14.1 = 9.7) is significant.

Author’s note:

With respect to the examples described above regarding Margaret and Carl, it is important that the

spouse beneficiary of an IRA owner take the following steps if the IRA owner dies on or after his

required beginning date:

1. The spouse beneficiary must determine whether the IRA owner received the required

minimum distribution for the year of the IRA owner’s death.

26

2. If the answer is no, then the spouse beneficiary should immediately withdraw the unpaid required minimum distribution applicable to the deceased IRA owner as soon as possible after the IRA

owner’s death.

3. The spouse beneficiary should immediately roll over or directly transfer the balance in

the decedent’s IRA account into an IRA account established in the surviving spouse’s own name.

Remember, however, that the surviving spouse may not roll over or directly transfer any unpaid

required minimum distribution attributable to the deceased IRA owner into the surviving spouse’s IRA.

4. The surviving spouse should immediately select primary and contingent beneficiaries

for the surviving spouse’s IRA account that are consistent with the surviving spouse’s estate plan.

5. The surviving spouse should act promptly since this spousal rollover or direct transfer

transaction may only be accomplished during the surviving spouse’s lifetime. An untimely death of

the spouse prevents the transaction from taking place. In addition, if the surviving spouse becomes

disabled, then a significant delay may take place.

6. The surviving spouse can accomplish this by means of a rollover or a direct transfer

from the decedent’s IRA into an IRA established by the surviving spouse.

7. The surviving spouse may use a pre-existing IRA or establish a new IRA. Remember

that the beneficiaries of the spouse’s IRA must be consistent with the surviving spouse’s estate plan.

Author’s note:

For several reasons it is best that the surviving spouse use the direct transfer approach since it is

an expedited approach and avoids problems.

27

Use of Separate Irrevocable Spendthrift Trust as

Beneficiary of an Inherited IRA for Asset Protection Purposes

Executive Summary:

Based on a Kansas Appellate state court case, it may be worthwhile to have an irrevocable spendthrift trust named as the beneficiary of the IRA for asset protection purposes. See Commerce Bank v Bolander, 2007 WL 1041760, Kan. App. 2007.

The following is an example of spendthrift language:

No interest of the beneficiary under this trust agreement whether characterized as either

income or principal by a court or by this agreement shall be subject to pledge,

assignment, sale or transfer in any manner, nor shall the beneficiary have the right to

anticipate, charge or encumber his or her interest, nor shall such interest be liable or

subject in any manner for the debts, contracts, liabilities, or torts of such beneficiary.

To summarize, it is possible that leaving an IRA to a revocable trust may expose an inherited IRA to

claims of the deceased IRA owner’s creditors based on the Kansas court case referred to above. That

is why naming an irrevocable trust as IRA beneficiary is ideal. Doing so generally provides protection

from creditors of both parties, namely from creditors of the deceased IRA owner and from creditors

of the IRA beneficiary. Remember that an irrevocable trust is not an irrevocable beneficiary of an IRA.

The IRA owner, if competent, can generally change the beneficiary of an IRA account at any time.

Reminder:

In order to use the life expectancy of the trust beneficiary, certain IRS documentation requirements

must be satisfied by no later than October 31st following the year of death of the IRA owner. Under the

IRS rules, the trustee of the trust must either;

(1) Provide the [IRA institution] with a final list of all beneficiaries of the trust (including

contingent and remaindermen beneficiaries with a description of the conditions on their

entitlement) as of September 30 of the calendar year following the calendar year of the [IRA

owner’s] death; certify that, to the best of the trustee’s knowledge, this list is correct and

complete and that certain requirements described in the IRS regulations are satisfied; and

agreed to provide a copy of the trust instrument to the [IRA institution] upon demand; or

(2) Provide the [IRA institution] with a copy of the actual trust document for the trust that is

named as a beneficiary of the [IRA owner] under the [IRA agreement] as of the [IRA

owner’s] date of death.

28

What You Should Know About the One-Per-Year Limit on IRA Rollovers that You Don’t Know

Practitioners must become aware of the tax-free IRA rollover rules that are applicable as of January 1,

2015. This is necessary in order for practitioners to protect their clients from major tax problems and

penalties if clients violate the new IRA rollover rules that start in 2015.

The following is a brief analysis of the old rules:

(1) The IRS in Publication 590 for many years indicated that if you multiple IRAs, that it was

permissible to do multiple IRA rollovers if you followed the rules set out in IRS Publication

590.

(2) The old rules as described in IRS Publication 590 stated the following:

Waiting period between rollovers. Generally, if you make a tax-free

rollover of any part of a distribution from a traditional IRA, you cannot,

within a 1-year period, make a tax-free rollover of any later distribution

from that same IRA. You also cannot make a tax-free rollover of any

amount distributed, within the same 1-year period, from the IRA into

which you made the tax-free rollover. The 1-year period begins on the

date you receive the IRA distribution, not on the date you roll it over into

an IRA.

Example. You have two traditional IRAs, IRA-1 and IRA-2. You make a

tax-free rollover of a distribution from IRA-1 into a new traditional IRA

(IRA-3). You cannot, within one year of the distribution from IRA-1, make

a tax-free rollover of any distribution from either IRA-1 or IRA-3 into

another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you form

making a tax-free rollover from IRA-2 into any other traditional IRA.

This is because you have not, within the last year, rolled over

tax-free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.

Based on IRS Publication 590, taxpayers could have multiple IRA rollovers during a 1-year period

since the 1-year limitation rule was applied on an IRA by IRA basis. In essence, each IRA maintained

by an IRA owner would have a separate 1-year period as described above.

The old rules were widely known by practitioners, financial institutions and consumers. The old rules

could be used as an income tax planning technique in order to provide a tax-free and penalty free loan

to a taxpayer if the taxpayer had a number of separate IRAs.

(3) The new rules

The old rules were used by many until the Tax Court spoke in Bobrow v. Commissioner in 2014.

In the Bobrow case the Tax Court held that one-year limitation rule under Internal Revenue

Code Section 408(d)(3)(B) applied on an aggregate basis and not on an IRA by IRA basis.

29

The IRS in Publication 590-A explains how the IRA rollover rues will work starting in 2015 and states

as follows:

Application of one-rollover-per-year limitation. Beginning in 2015, you can

make only one rollover from an IRA to another (or the same) IRA in any 1-year

period regardless of the number of IRAs you own. The limit will apply by

aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well

as traditional and Roth IRAs, effectively treating them as one IRA for purposes of

the limit. However, trustee-trustee transfers between IRAs are not limited and

rollovers from traditional IRAs to Roth IRAs (conversions) are not limited.

Example. John has three traditional IRAs; IRA-1, IRA-2, and IRA-3. ***

On January 1, 2015, John took a distribution from IRA-1 and rolled it over

into IRA-2 on the same day. For 2015, John cannot roll over any

other 2015 IRA distribution, including a rollover distribution involving IRA-3.

This would not apply to a conversion.

The IRS has issued two announcements involved the application of the one-rollover-per-year limitation in IRA rollovers.

These announcements are Announcement 2014-15 and 2014-32.

The IRS decided that it was best to have the new rules for administrative purposes become effective as

of January 1, 2015 and not applied on a retroactive basis.

IRS Announcement 2014-32 was fairly comprehensive and made the following points:

1. Amounts receive from an IRA will not be included in the gross income of a distributee to the

extent that the amount is paid into an IRA for the benefit of the distributee under the 60-day

rollover rule.

Author’s note:

Publication 590-B indicates that certain distributions are not eligible for rollover.

For example, amounts that must be distributed (required minimum distributions) during a

particular year are not eligible for rollover treatment.

2. The Internal Revenue Code at Section 408(d)(3)(B) is the key section involved under the one-

rollover-per-year limit on IRA rollovers.

3. The IRS announcement stated that an individual receiving an IRA distribution on or after

January 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual

has received a distribution from any IRA in the preceding 1-year period that was rolled over

30

into an IRA, but subject to transitional rules for certain prior transactions.

4. The IRS in Publication 590 and the IRS proposed regulations had previously provided that the

IRA rollover rules were based on an IRA by IRA basis. However, the Tax Court in Bobrow v.

Commissioner, a 2014 opinion held that the one-rollover-per-year limit applied on an aggregate

basis and not on an IRA by IRA basis.

5. The IRS will apply the Bobrow interpretation of the law under Section 408(d)(3)(B) for

distributions occurring on or after January 1, 2015.

6. A rollover from a traditional IRA to a Roth IRA (a conversion) is exempt from the one-rollover-

per-year rule. It is not considered in applying the one-rollover-per-year rule to other rollovers.

7. A rollover from a Roth IRA to any Roth IRA [including the same Roth IRA] would preclude

any other Roth IRA rollovers to any Roth IRA under the 1-year rule. It would also preclude

any rollovers from one traditional IRA to a traditional IRA [including the same traditional IRA]

under the 1-year rule.

8. A rollover from a traditional IRA to any traditional IRA [including the same traditional IRA]

would preclude any other traditional IRA rollovers under the 1-year rule. It would also preclude

any rollover from any Roth IRA to a Roth IRA [including the same Roth IRA] under the 1-year

rule.

9. According to the IRA for purposes of Announcement 2014-32 the term “traditional IRA”

includes a simplified employee pension under IRC Section 408(k) and a Simple IRA under IRC

Section 408(p).

10. The IRS indicated that the one-rollover-per-year limitation does not apply to a rollover to an

IRA from a qualified plan. In addition, the IRS also indicated that the one-rollover-per-year

limitation does not apply to rollover to a qualified plan from an IRA.

11. The one-rollover-per-year limitation rule does not apply to trustee-to-trustee transfers.

A violation of the one-rollover-per-year-limit on IRA rollover will lead to headaches. Not only may the

violation of the rollover limitation rule trigger taxable events (income taxes and possible accuracy

penalties and early distribution penalties) but it may in many instances be treated as an excess

contribution that was made to the receiving IRA as well. An excess contribution to an IRA is subject to

a 6 percent penalty tax that is ongoing on the excess amount that it remains in the IRA at the end of

each year. A special correction rule, however, applies to the first year that an excess contribution is

made.

31

The IRS issued information release IR-2014-107 on November 10, 2014. The release states in part the

following:

Although an eligible IRA distribution received on or after January 1, 2015 and

properly rolled over to another IRA will still get tax-free treatment, subsequent

distributions from any of the individual’s IRAs (including traditional and Roth

IRAs) received within one year after that distribution will not get tax-free

rollover treatment.

According to IRC Section 408(d)(3)(B) the tax-free rollover rules do not apply to any amount . . .

received by an individual from an individual retirement account or individual retirement annuity if at

any time during the 1-year period ending on the day of such receipt such individual received any other

amount . . . from an individual retirement account or an individual retirement annuity which was not

includible in gross income. . .

Spousal IRA Rollovers and the One-Per-Year-Limit on IRA Rollovers

Based on the above legal analysis, spousal IRA rollovers would fall with the one-per-year limit on IRA

rollovers. The Tax Court opinion and the law clearly indicates that any amount received by an individual

from an individual retirement account or individual retirement annuity [regarding tax-free rollovers] is

subject to the one-per-year limit on IRA rollovers.

Obviously, the law does not distinguish between a spousal rollover from a decedent’s IRA and a rollover

from the spouse’s own IRA. The law is inclusive and covers any IRA distribution received by an

individual under the one-per-year limit on IRA rollovers.

One cannot argue that a spouse is not an individual with respect to a spousal IRA rollover. Further, it

cannot be successfully argued that upon the death of an IRA owner survived by a spouse beneficiary

that the spouse is not the legal owner of the decedent’s IRA as a matter of law.

Of course, the spouse beneficiary of the decedent’s IRA is the legal owner of the decedent’s IRA as of

the date of death of deceased IRA owner. The surviving spouse is the beneficiary of a non-probate asset

and as such owns the deceased IRA owner’s account.

This legal position is consistent with Revenue Procedure 89-52 in which the IRS clearly indicates in

the context of an inherited IRA that is payable to nonspouse beneficiaries, that each beneficiary will

own a fifty percent share of the IRA.

Once an IRA owner dies survived by a spouse beneficiary, then the deceased IRA owner’s account is

maintained for the benefit of the surviving spouse within the purview of Section 408(d)(3) of the

Internal Revenue Code. If this were not the case, the spousal rollover of IRA would not be valid under

the Internal Revenue Code. As previously discussed on the death of IRA owner survived by a surviving

spouse, the owner of the deceased IRA owner’s account is then the surviving spouse. At that time, the

deceased IRA owner’s account is then maintained for the surviving spouse and should be subject to the

one-per-year limit on IRA rollovers.

32

Based on the above analysis, the following are examples of issues that a surviving spouse should be

aware of:

Comprehensive example

John is an IRA owner who dies at age 68 on May 1, 2017 survived by his spouse Mary. His spouse

Mary is age 65 in 2017 and has her own IRA. She is also the beneficiary of John’s IRA.

Assume that Mary receives an IRA distribution of $100,000 from her own IRA on February 1, 2017 and rolls it over to another IRA in her name on March 1, 2017.

In addition, on June 15, 2017 she receives a distribution from John’s deceased IRA of $200,000 and

rolls it over to her own IRA on July 1, 2017.

Question 1: Has Mary violated the one-per-year limit on IRA rollovers?

Answer: Yes. Since Mary received a distribution of $200,000 from John’s deceased IRA account on June 15, 2017, she is in violation of one-per-year limit on IRA rollovers.

The reason is that under the one-per-year limit in IRA rollovers, Mary could not rollover tax-free any

IRA distribution she receives during the one-year measuring period rule under the Internal Revenue

Code. Since Mary received IRA distribution from her own IRA on February 1, 2017, then under the

aggregation rule, she would have to wait until at least February 1, 2018 in order to take another IRA

distribution which would be eligible for tax-free rollover treatment.

Question 2: Assume the facts in Question 1. What are the tax consequences that are triggered as a result

of the $200,000 rollover by Mary on July 1, 2017?

Answer: According to the IRS and the law, Mary would have to report the $200,000 amount in income

for the calendar year 2017. In addition, she is subject to an excess contribution tax penalty of 6% unless

corrected in the manner required by the IRS.

Question 3: How can the taxable event described in the answer to question 2 be avoided?

Answer: Mary should arrange for John’s deceased IRA to be directly transferred from John’s deceased IRA account to Mary’s IRA.

Although the Bobrow case covers traditional IRAs, the language in Bobrow and in the Internal Revenue

Code is broad enough to include all IRAs, including a decedent’s IRA that is payable to a surviving

spouse.

APPENDIX A

Table I – Single Life Expectancy

Table II – Uniform Lifetime Table

TABLE I

Single Life Table

Age

Life

Expectancy Age

Life

Expectancy Age

Life

Expectancy Age

Life

Expectancy

0 82.4 29 54.3 58 27.0 87 6.7

1 81.6 30 53.3 59 26.1 88 6.3

2 80.6 31 52.4 60 25.2 89 5.9

3 79.7 32 51.4 61 24.4 90 5.5

4 78.7 33 50.4 62 23.5 91 5.2

5 77.7 34 49.4 63 22.7 92 4.9

6 76.7 35 48.5 64 21.8 93 4.6

7 75.8 36 47.5 65 21.0 94 4.3

8 74.8 37 46.5 66 20.2 95 4.1

9 73.8 38 45.6 67 19.4 96 3.8 10 72.8 39 44.6 68 18.6 97 3.6

11 71.8 40 43.6 69 17.8 98 3.4

12 70.8 41 42.7 70 17.0 99 3.1

13 69.9 42 41.7 71 16.3 100 2.9

14 68.9 43 40.7 72 15.5 101 2.7

15 67.9 44 39.8 73 14.8 102 2.5 16 66.9 45 38.8 74 14.1 103 2.3

17 66.0 46 37.9 75 13.4 104 2.1

18 65.0 47 37.0 76 12.7 105 1.9

19 64.0 48 36.0 77 12.1 106 1.7

20 63.0 49 35.1 78 11.4 107 1.5 21 62.1 50 34.2 79 10.8 108 1.4

22 61.1 51 33.3 80 10.2 109 1.2

23 60.1 52 32.3 81 9.7 110 1.1

24 59.1 53 31.4 82 9.1 111+ 1.0

25 58.2 54 30.5 83 8.6 26 57.2 55 29.6 84 8.1 27 56.2 56 28.7 85 7.6

28 55.3 57 27.9 86 7.1

A-1

TABLE II

Uniform Lifetime Table

Age of Employee

Distribution

Period Age of Employee

Distribution

Period

70 27.4 92 10.2

71 26.5 93 9.6

72 25.6 94 9.1

73 24.7 95 8.6

74 23.8 96 8.1

75 22.9 97 7.6

76 22.0 98 7.1

77 21.2 99 6.7

78 20.3 100 6.3

79 19.5 101 5.9 80 18.7 102 5.5

81 17.9 103 5.2

82 17.1 104 4.9

83 16.3 105 4.5

84 15.5 106 4.2

85 14.8 107 3.9

86 14.1 108 3.7

87 13.4 109 3.4

88 12.7 110 3.1

89 12.0 111 2.9

90 11.4 112 2.6 91 10.8 113 2.4

92 10.2 114 2.1

93 9.6 115+ 1.9

A-2

APPENDIX B

Articles on Retirement Distribution Issues

B-1

Ed Slott, CPA, Ed Slott’s IRA Advisor and Smart Subscriptions, LLC has granted permission to

transmit the following article, written by Seymour Goldberg, CPA, MBA, JD, in any format.

REPRINT Ed Slott’s IRA Advisor October 2017 issue

Guest Expert

Seymour Goldberg CPA, MBA, JD

Goldberg & Goldberg, P.C.

Melville, NY

Practical Issues When An IRA Owner Dies

The death of an IRA owner raises complicated legal issues. Often, these issues are mishandled—

and the consequences can be extremely costly.

The problems may be especially acute when the IRA owner’s spouse is the sole beneficiary,

which frequently is the case. Often, the surviving spouse will be in shock, not knowing what to

do or whom to ask for advice.

Increasingly, IRAs are being left to a trust. (So-called IRA trusts might become even more

prevalent if the federal estate tax is abolished, as President Trump has proposed, because many

attorneys may add IRA trusts to their practice.) Using a trust can create more opportunities for

errors.

For advisors, the solution is to remain diligent. When a client dies, follow up on the IRA or IRAs

held by that individual, to assist with implementation of the post-death IRA distribution rules.

Make sure that someone—the client’s attorney, accountant, or financial advisor—is

quarterbacking the process, so that all required actions are taken and decisions are made

thoughtfully.

Year of death distributions

In many cases, the deceased IRA owner was over age 70-1/2, thus taking required minimum

distributions (RMDs). If so, an RMD will be required for the year of death.

Say Sam Smith, age 85, dies in November 2017 and has not taken any of his RMD for this year.

(That’s often the case.) If Sam’s beneficiary is his wife Sue, then Sue is responsible for taking

the RMD from Sam’s IRA for 2017, or she may owe a 50% fine.

Calculating the RMD obligation and making a timely payment can be difficult, especially for a

recent widow or widower. Ideally, one of Sue’s advisors will contact the IRA custodian or

custodians, determine what paperwork is necessary, and see that the RMD is distributed to Sue.

Note that the IRA custodian may not make this distribution, after an advisor’s phone request.

Generally, a letter of authority from the IRA beneficiary is required.

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Moreover, a surviving spouse may not survive very long. It’s not unheard of for one spouse to

die shortly after the other: in the above example, Sue might die before taking an RMD from

Sam’s IRA, for Sam’s year of death.

The entire process might take months. It includes taking any unpaid RMDs, then transferring the

decedent’s IRA to the surviving spouse’s IRA, and naming any children as the surviving spouse’s

IRA beneficiaries, if that’s desired.

As a result of such delays, Sue might die before transferring Sam’s IRA into her own IRA and

naming their children as beneficiaries. In that case, the account could pass to Sue’s estate or, in

some situations, to a default beneficiary.

Either way, the successor IRA beneficiary would use Sue’s remaining single life expectancy, and

RMDs would be accelerated. The ability to stretch the IRA over their children’s life expectancies

could be lost, potentially costing large amounts of tax-deferred buildup.

Default beneficiaries

Advisors should realize that many major financial firms have default beneficiary provisions in

their IRA adoption agreements. Thus, if someone inherits an IRA and dies before naming

beneficiaries, the default beneficiary will get the money—and that person might not be the

desired recipient.

For example, Marjorie Wilson dies and leaves her IRA to her son Nick. Then Nick dies without

naming a beneficiary and the IRA custodian’s adoption agreement states the default beneficiary

is his spouse.

In this example, Nick would not have wanted his second wife Paula to get the IRA. Other assets

are provided for her, under a prenuptial agreement, in which she waived her rights to any

retirement accounts.

Nevertheless, under the IRA custodian’s adoption agreement Paula would be the default

beneficiary, rather than Nick’s children from a prior marriage. If Nick had known about this, he

would have used the financial firm’s form to name his children as successor beneficiaries.

Nick’s children or Nick’s estate might have to go to court, in an attempt to claim Nick’s IRA. To

avoid such problems, as well as significant litigation costs, advisors should see that clients’ IRAs,

including inherited IRAs, are handled properly. In this example, after Nick inherits the IRA it’s

vital to make sure that he has a successor beneficiary form that names his children on file with

the IRA institution.

This issue could involve many millions of inherited IRA accounts that have default beneficiary

provisions in their IRA adoption agreements. A similar problem may crop up if IRA owners

neglect to fill out their beneficiary form.

Power plays

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A surviving spouse could have some physical or mental condition that hampers decision making.

To protect against such possibilities, advisors might suggest that elderly clients execute a power

of attorney, naming a trusted individual as their agent, authorized to make financial decisions on

their behalf.

A power of attorney may be especially vital for a recent widow or widower. However, a power

of attorney might encounter obstacles, after the death of an IRA owner. IRA custodians may not

honor the agent’s right to select beneficiaries of the surviving spouse’s IRA.

Anticipating such problems, I have a special power of attorney form that I use for clients, when

deemed necessary. This form specifically gives the agent the right to transfer the IRA to the

spouse’s name, if indicated, and to distribute RMDs to the surviving spouse.

This special power also allows the agent to appoint beneficiaries of the surviving spouse’s IRA.

To avoid any appearance of self-dealing, the special power might say that the agent can “pick

the following beneficiaries,” naming the people the agent would be able to select.

Trust worthy

Still more issues may arise if an IRA trust is the intended beneficiary. That is, Jim Jones would

work with an attorney to create the Jim Jones Trust.

At Jim’s death, this trust would be Jim’s IRA beneficiary. Jim’s wife Jan would be the

beneficiary of the trust, receiving distributions passed from the IRA to the trust and on to Jan.

Thus, it would be the Jim Jones Trust for the benefit of (F/B/O) Jan Jones. This arrangement

might serve to protect the funds in the IRA from being squandered by the beneficiary, if that

beneficiary is in failing mental or physical health.

It’s critical, when setting up such an IRA trust, to specify on the beneficiary form that the trust

will be the IRA beneficiary only if Jan survives Jim. The beneficiary form should list contingent

beneficiaries (such as their children) if Jan should predecease Jim.

Assuming that the attorney drafting the trust foresees such contingencies, the trust beneficiary

may be well-served, as he or she advances in age. So where is the problem?

From what I’ve seen, in many cases the IRA trust may not be named on the IRA beneficiary

form in a timely manner. Dozens of times, I have discovered that the IRA beneficiary forms

have not been done promptly: that is, until 3-4 months after the establishment of the IRA trust.

All that time and effort and expense, in the trust creation, will be wasted if the IRA balance

doesn’t flow into the IRA trust, as the designated beneficiary, if the IRA owner died in this gap

period.

Therefore, I insist that a new IRA beneficiary form, naming the IRA trust, is put into play on the

day the IRA trust is finalized. Some advance planning may be necessary, to see that the IRA

custodian is notified promptly.

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If the IRA trust is not the designated beneficiary at the IRA owner’s death, the IRA would be left

to the individual previously named on the beneficiary form, or perhaps to the IRA owner’s estate.

As mentioned above, the opportunity for a valuable stretch IRA might be lost.

To qualify for stretch IRA tax benefits, a copy of the trust document must be provided to the IRA

custodian by October 31st of the year following the year of the IRA owner’s death. Naming the

trust also can be critical: the beneficiary form should refer to the Jim Jones Trust, without

including the words “deceased” or “IRA” in the title of the trust.

A minor beneficiary can be a major headache

Some IRA owners choose to name a minor, such as a child or grandchild, as the IRA beneficiary.

A young beneficiary will have a long life expectancy, which can lead to extraordinary wealth

creation from decades of tax deferral.

However, some financial firms won’t pay IRA money to a minor named as IRA beneficiary. The

minor’s family may have to go to court to get a guardian of the property appointed, for as long

as the minor is under age.

To deal with any possible problem, care should be taken with the beneficiary form. One approach

is to include language to deal with a beneficiary who might be under age.

The form might state, if the beneficiary is not 18 or 21 or 25 (depending on relevant state law),

my executor can name a custodian until the beneficiary comes of age, under the Uniform

Transfers To Minors Act (UTMA), and the IRA would be payable to the UTMA account.

The executor might be able to name any adult person, including himself or herself, to serve as

custodian for the minor. Again, it would up to the IRA owner’s advisors to see that the proper

procedures are followed, to minimize potential perils.

Advisor action plan:

[] At client meetings, discuss IRA beneficiaries. Request a look at the beneficiary forms, to see

if changes are advisable.

[] If an IRA is to be left to a trust, contact the attorney who drafted it. Make sure the trust is the

designated IRA beneficiary.

[] Point out the possible problems with any minor beneficiaries, and suggest contacting the IRA

custodian for suggestions.

[] After the death of a client, follow up to see if anyone will be helping the heirs with IRA

paperwork issues.

More insights on these and other related topics can be found in two books by Seymour Goldberg,

available through the American Bar Association. They are:

B-5

Inherited IRAs, What Every Practitioner Must Know, 2017 Edition And IRA Guide to IRS

Compliance Issues, Including IRA Trust Violations Call 800-285-2221 or visit shopaba.org for

further details.

B-6

Ed Slott, CPA, Ed Slott’s IRA Advisor and Smart Subscriptions, LLC has granted permission to

transmit the following article, written by Seymour Goldberg, CPA, MBA, JD, in any format.

REPRINT Ed Slott’s IRA Advisor January 2018 issue

Guest IRA Expert

Seymour Goldberg, CPA, MBA, JD

Goldberg & Goldberg, P.C.

Melville, NY

Practical Issues Involving Implementing IRA Trusts

(from a state trust accounting point of view)

The use of IRA trusts in estate planning and asset protection planning is often used by

practitioners. This article will focus on a number of technical issues that practitioners should be

aware of in order to avoid headaches down the road when implementing an IRA trust. Whenever

the term “IRA trust” is referred to in this article, it refers to an IRA trust other than an IRA QTIP

trust.

Drafting an IRA trust is not an easy task for a practitioner who is not aware of both the IRS IRA

compliance issues as well as the state trust accounting rules as reflected in the Uniform Principal

and Income Act (UPAIA).

It is extremely important that the practitioner become familiar with the UPAIA state trust

accounting rules that apply to trusts. It is especially important when an IRA trust document is

involved.

The author has found that there are not many CLE or CPE programs that cover the UPAIA rules.

It is therefore important that practitioners learn the rules by reading the law and the commentary

regarding the meaning of the provisions of the UPAIA. That is the approach that the author has

taken.

There is a need for the practitioner to connect the dots of an IRA trust from an IRS compliance

point of view as well as from the UPAIA point of view. Often the practitioner focuses in on the

IRS compliance point of view and fails to consider the UPAIA trust accounting provisions to

any major extent or not at all in implementing an IRA trust document.

One of the key points that may not be necessarily understood by the practitioner who is engaged

to implement an IRA trust is that the definition of income under the UPAIA and the definition

of income under the Internal Revenue Code is often not the same.

For example, if an IRA distribution of a required minimum distribution of $10,000 is made from

the decedent’s IRA to the IRA trust, then the $10,000 received by the IRA trust is ordinary

income from an income tax point of view but is not trust accounting income from the UPAIA

point of view. The author discovered this issue when taking a CLE program on the UPAIA many

years ago when New York State adopted the UPAIA effective as of January 1, 2002.

B-7

So if the IRA trust provides that Joey the beneficiary of the IRA trust is to receive net income

each year, then Joey would not receive $10,000 under the UPAIA, but instead Joey would

generally receive 10% of $10,000 or $1,000. The reason for that is that under the UPAIA

only 10% of a required minimum distribution is considered trust accounting income. That is the

rule in New York and in many other jurisdictions. In fact, Joey may not even receive $1,000 if

there are expenses that are incurred in administering the IRA trust.

Obviously, the IRA trust document provisions will determine what Joey receives and the IRA

trust document is generally governed by the UPAIA. However, the UPAIA need not apply if the

terms of the trust provides otherwise. The author in implementing an IRA trust document

generally provides otherwise.

As previously mentioned most states have similar UPAIA provisions regarding the 10% rule that

New York State has. In the event that the practitioner implementing the IRA trust (a non QTIP

IRA trust), the practitioner generally should not use the term income. If Joey is paid $10,000

instead of $1,000 (assuming no expenses are incurred) by the trustee, then the trustee will have

significant liability problems in a contested accounting. This type of mistake does happen

because trustees are often not familiar with the UPAIA.

Assume that the non QTIP IRA trust uses terms like net income, then we have to address how

expenses for administering an IRA trust are handled. These expenses can be normal accounting

fees, tax preparation fees and the portion of trustee commissions that are charged against trust

accounting income. Under New York State law annual trustee commissions are payable one-

third from income and two-thirds from principal unless the trust instrument otherwise explicitly

provides. Other states may use different allocation percentages regarding trustee fees.

In the event that the trust does not have sufficient income in a given year, then the trustee is not

allowed to receive a portion of the trustee commission that is charged to income to the extent of

any shortfall. So if the annual trustee commission in New York State is say $6,000, then $2,000

is charged against income. If the income is only $1,000, then the trustee receives only $1,000

and the balance of $1,000 cannot be paid to the trustee from income earned in a later year.

The way to handle this issue in an IRA trust that is subject to New York law is to provide that

any and all annual trustee commissions shall be paid from principal.

Further, the author in an IRA trust provides that all expenses shall be paid from principal and not

from income in whole or in part. This is necessary since there is generally insufficient income

earned by the IRA trust to provide a trustee with a source to pay the trustee expenses.

Also the author covers in the IRA trust what happens if the IRA trust beneficiary is required to

receive RMDs during his/her lifetime and dies in a given year prior to receiving the RMD for

that given year. This should be addressed in the IRA trust document in order to avoid problems.

An IRA trust has many moving parts and needs a great deal of thought before it is implemented.

Normally an IRA owner need not worry about creditors attacking the IRA owner’s account

during his/her lifetime.

B-8

Under New York law an IRA payable to a beneficiary is not subject to the claims of creditors of

the deceased IRA owner. That would not be the case if the beneficiary of the deceased IRA

owner is his/her estate. The IRA owner should not select the estate as the beneficiary of his/her

IRA.

Many practitioners often use revocable trusts in an estate plan. The practitioner may also use a

revocable trust as the beneficiary of an IRA. An interesting case involving the use of a revocable

trust as the beneficiary was decided in a Kansas court in 2007 that practitioners need to be aware

of.

The following is an executive summary of the Kansas court case involving the use of a revocable

trust as the beneficiary of an IRA:

The IRA assets payable to a revocable trust are subject to the claims of Wanda’s

[the IRA owner’s] creditors upon her death pursuant to Kansas law. Although

Wanda’s IRA benefits were not available to her creditors during her lifetime,

they are available to her creditors upon her death because the IRAs were payable

to an inter vivos revocable trust. Had Wanda named specific beneficiaries

the IRA proceeds would have automatically passed to them upon her death and

the result would have been (according to the court) a benefit. However, that is

not the estate planning approach selected by Wanda. Instead Wanda named her

revocable trust as the beneficiary of her IRAs, and the legislature has determined

that assets in a revocable trust are subject to the claims of creditors of the settlor

at the death of the settlor.

The court case is Commerce Bank v. Bolander, Kan. App. 2007.

The author suggests that a practitioner implementing an IRA trust consider using an irrevocable

trust instead of a revocable trust as the beneficiary of an IRA if the IRA owner is concerned

about the possibility that his/her creditors may go after the IRA assets that are payable to the

IRA trust after the IRA owner’s death

This opinion is discussed in the author’s ABA Guide entitled “IRA Guide to IRS Compliance

Issues – Including IRA Trust Violations.”

It is interesting to note that the Kansas court ignored the argument of the trustee that the trust

became irrevocable after Wanda’s death and should be exempt from any and all claims of

creditors of the decedent.

The Kansas court opinion was based on the interpretation of the Kansas Uniform Trust Code

which provides that during the lifetime of the settlor, the property of a revocable trust is subject

to the claims of the settlor’s creditors. Kansas law provides in part that “after the death of a

settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid,

the property of a trust that was revocable at the settlor’s death is subject to claims of the

settlor’s creditors.”

B-9

Many states (over 30 states) have adopted versions of the Uniform Trust Code. These states

may or may not have included provisions similar to the Kansas Uniform Trust Code regarding

creditors rights and revocable trusts.

Practitioners implementing IRA trusts should look at the provisions under state law that apply

to IRAs and retirement type assets that are payable to revocable trusts to play it safe.

It should be noted that the Surrogate’s Court in New York County has taken the position that

IRAs are protected from claims of creditors of a deceased IRA owner. However, the case

involved an IRA that was payable to an irrevocable trust. See In Re Gallet, 190 Misc. 2d 303

(2003).

An IRA trust should be an easy trust to contest if the terms of the trust are not carefully drafted

or if the trustee administers the IRA trust in an improper or careless manner.

Seymour Goldberg, CPA, MBA, JD is the senior partner in the law firm of Goldberg &

Goldberg, P.C. in Long Island, New York. He was formerly associated with the Internal

Revenue Service. He conducted many continuing education programs with the IRS and other

organizations on the retirement distribution rules. He has written two books on IRA issues for

the American Bar Association which can be found in law school libraries throughout the

United States. They are Inherited IRAs, What Every Practitioner Must Know, 2017 Edition

and IRA Guide to IRS Compliance Issues, Including IRA Trust Violations, call 800-285-2221

or visit shopaba.org for further details.

Mr. Goldberg can be reached at 516-222-0422 or by email at info.goldbergira@gmail.com.

B-10

This article is reprinted with the publisher’s permission from Estate Planning Review – The

Journal, a monthly publication of CCH, a part of Wolters Kluwer. Copying or distribution

without the publisher’s permission is prohibited. To subscribe to Estate Planning Review – The

Journal or other CCH, a part of Wolters Kluwer publications, please call 800-449-8114 or visit

CCH

IRA trusts after the Tax Cuts and Jobs Act

by Seymour Goldberg, CPA, MBA, JD

Many taxpayers have accumulated significant assets in their retirement accounts including IRA

accounts (both traditional and Roth IRAs). These assets can be made payable to a trust instead

of directly to an individual beneficiary for both estate planning and asset protection purposes.

Some advantages of making an IRA trust as the beneficiary of a retirement account follows:

1) If the IRA death benefits are payable directly to a beneficiary, then the death benefits

may be accelerated at any time by the beneficiary.

2) If the IRA death benefits are payable to a trust, then the payments can be payable in a

manner that results in an extended payout period to the trust beneficiary.

3) The life expectancy of the appropriate trust beneficiary may be used in determining the

payout period.

4) The remainderman of the trust can be determined by the IRA owner on the death of the

primary trust beneficiary.

5) The life expectancy of a child or grandchild can be used in determining the payout period

if the child or grandchild is the appropriate trust beneficiary.

6) The IRA trust can provide for greater asset protection since most states do not protect

inherited IRAs from creditors of the IRA beneficiary.

7) The income tax brackets of the appropriate trust beneficiary may be significantly lower

than the income tax brackets of the surviving spouse of the IRA owner under the new tax

law effective January 1, 2018.

If the “kiddie tax” is an issue, then use Roth IRA trusts if the IRA owner has accumulated

sufficient Roth IRA assets. Alternatively live with the “kiddie tax” for whatever limited period

is involved since the payout period for a young trust beneficiary is significant. For example, if

a child or grandchild trust beneficiary is age 16 in the year after the IRA owner’s death, then the

IRS single life expectancy is 66.9 years.

Consider giving the trust beneficiary a 5 and 5 power over the trust assets when the trust

beneficiary attains age 25 or older.

Many clients who have a substantial net worth in their retirement accounts may wish to transfer

these types of accounts to their children and/or grandchildren by means of an IRA trust

arrangement.

B-11

The drafting of an IRA trust should be done in a manner that is consistent with the IRS final

regulations and the related IRS rules discussed below.

On the death of the IRA owner and/or retirement account owner, then the post-death IRS

compliance rules regarding IRA trusts must be followed in order to avoid the loss of the extended

payout period.

The author is also aware of a number of situations whereby the IRA trust was drafted in a manner

that was inconsistent with the IRS rules which then resulted in adverse tax consequences to the

trust and trust beneficiary as well.

The bottom line is that the estate practitioner should familiarize himself/herself with the IRS

rules, whether it be in the IRS regulations, the Internal Revenue Code, Revenue Rulings, letter

rulings and IRS notices. That may be a problem for a practitioner who is not well versed in these

rules.

Seymour Goldberg, CPA, MBA, JD is the senior partner in the law firm of Goldberg & Goldberg,

P.C. in Long Island, New York. He was formerly associated with the Internal Revenue Service.

He conducted many continuing education programs with the IRS and other organizations on the

retirement distribution rules. He has written two books on IRA issues for the American Bar

Association which can be found in law school libraries throughout the United States. They are

Inherited IRAs, What Every Practitioner Must Know, 2017 Edition and IRA Guide to IRS

Compliance Issues, Including IRA Trust Violations, call 800-285-2221 or visit shopaba.org for

further details.

Mr. Goldberg can be reached at 516-222-0422 or by email at info.goldbergira@gmail.com.

You may also visit his website at TrustEstateProbate.com.