Distributions to Children and Other Heirs
Distributions to Children and Other Heirs: If the IRA owner designates a nonspouse as the beneficiary of the IRA, the beneficiary must receive distributions over a maximum ten-year term.Income in Respect of a Decedent: Ordinary income assets in the hands of a child or other heir are termed "income in respect of a decedent" (IRD) and governed by Sec. 691.
Special Rules for Surviving Spouses: Spouses who inherit an IRA have more flexibility than non-spousal beneficiaries regarding withdrawals.
Surviving Spouse Becomes the IRA Owner: If you are the surviving spouse and sole beneficiary of your deceased spouse's IRA, you may elect to be the owner or roll over the IRA into your own IRA.
Distributions to Children and Other Heirs
If the IRA owner designates a nonspouse to receive the IRA, unless the beneficiary is an "eligible designated beneficiary, " he or she must receive distributions over a maximum ten-year term. Under Sec. 401(a)(9)(E)(ii) the term "eligible designated beneficiary (EDB) " means any designated beneficiary who is the surviving spouse, a child who has not reached majority, a disabled individual within the meaning of section 72(m)(7), a chronically ill individual under Sec. 7702B(c)(2) or an individual who is not more than 10 years younger than the IRA owner.
An EDB is not obligated to deplete the IRA within 10 years and will likely take annual RMDs calculated based on their life expectancy. Beneficiaries have until Dec. 31 of the year following the IRA owner's death to begin withdrawals. However, if the original account owner was required to take an RMD in the year he or she died but had not yet, the beneficiary is required to take that RMD in the amount that the deceased would have withdrawn. If the IRA owner had reached the required beginning age for required minimum distribution, non-eligible designated beneficiaries must take RMDs each year and empty the IRA within ten years. A surviving spouse beneficiary may delay the commencement of distributions until the end of the year when the original IRA owner would have begun taking RMDs or until the surviving spouse's required beginning date.
Income in Respect of a Decedent
Ordinary income assets in the hands of a child or other heir are termed "income in respect of a decedent" (IRD) and governed by Sec. 691. While capital gain assets generally receive a step up in basis when transferred at death, there is no step up in basis for IRD. See Sec. 1014(c). Therefore, all payouts from a typical IRA will be taxed as ordinary income to the recipient.
If a pecuniary bequest, such as a fixed sum of money, is satisfied by IRD transferred to an estate, the income tax could be accelerated. Sec. 691(a)(2). However, mere division of an IRA or pension plan will ordinarily not trigger the recognition of IRD until the income is paid to a beneficiary.
If the IRD causes the estate to be subject to estate tax, there is an income tax deduction as the IRD is distributed. Sec. 691(c). The deduction is normally taken on the distributions of IRD and the usual method for determining the deduction is to allocate the amount of estate tax appropriate for the IRD and divide that number by the original value of the IRA. All distributions from the IRA then receive an allocation of the IRD Sec. 691(c) charitable deduction. This is deductible as a miscellaneous deduction not subject to the 2% floor.
Special Rules for Surviving Spouses
Spouses who inherit an IRA have more flexibility than non-spousal beneficiaries regarding withdrawals. The spouse can treat the IRA as his or her. The spouse can also roll it over into his or her pre-existing IRA. Finally, he or she may become the account beneficiary. The choice is usually based on when the spouse is due to take RMDs or whether a deceased owner was taking RMDs. The option may impact the size of the required minimum distributions.
Surviving Spouse Becomes the IRA Owner
If you are the surviving spouse and sole beneficiary of your deceased spouse's IRA, you may elect to be the owner or roll over the IRA into your own IRA. By combining the funds, the spouse doesn't need to take a required minimum distribution until he or she reaches the age of 73. Surviving spouses can divided the account and roll over part to his or her IRA and leave the balance in the inherited account.
Private Letter Rulings
PLR 200444033 Nieces May Divide IRA After Death of Aunt: Irene IRA owned an individual retirement account (IRA) and named her trust as the beneficiary of the IRA. After having reached her IRA required beginning date, Irene died. Consequently, Irene's trust was the beneficiary of the IRA. Further, the two primary beneficiaries of the trust were Irene's two nieces.PLR 201633025 Trust Deemed See-Through Trust: Decedent died at age 59. Trust was the sole beneficiary of Decedent’s three IRAs, combined into IRA X. Trust is irrevocable and valid under State’s laws.