Retirement Benefits Left to an Adult (Who is Neither the Surviving Spouse Nor Disabled/Chronically Ill)

Take-Away: The distribution choices are pretty straight-forward after the SECURE Act for an adult, non-spouse, non-disabled/chronically ill beneficiary. The SECURE Act’s 10-year distribution rule will usually apply, but with one narrow exception.

Background: If an adult who is not (i) a spouse of the IRA owner; (ii) chronically ill; (iii) disabled; or (iv) less than ten years younger than the IRA owner is named  as the beneficiary of an IRA, more likely than not the SECURE Act’s 10-year distribution rule will apply, whether the IRA assets are left directly to the individual beneficiary, or the IRA assets are left to either a conduit see-through trust or an accumulation see-through trust.

Narrow Exception: There is one major exception to the generalization that the 10-year distribution will always apply. If the IRA owner died after his/her required beginning date (now age 72), the designated beneficiary of the owner’s IRA can elect to continue to take the required minimum distributions based upon the life expectancy of the deceased IRA owner. This is the as-least-as-rapidly-distribution-rule that has been previously covered.

• Example- The At-Least-As-Rapidly Distribution Exception: Bill dies at age 73 years. Bill had passed his required beginning date (RBD) of age 72, so Bill was required to take his required minimum distributions from his IRA. Bill names his daughter Chelsea as the sole beneficiary of his IRA. Under the SECURE Act’s normal rule, Chelsea would be required to take distributions from the IRA that she inherits from Bill over the next 10 years, either in installments or in one large lump sum in the year in which the 10^th anniversary of Bill’s death. However, since Bill was older than his required beginning date, Chelsea has the option to continue to take required minimum distributions from Bill’s IRA using Bill’s remaining life expectancy, the as-least-as-rapidly-distribution rule.  Under the existing IRS ‘divisor’ tables, Bill’s life expectancy at age 73 (ignoring the reality that Bill actually died) is 15.5 years. The required minimum distribution from Bill’s IRA, following the least-as-rapidly distribution divisor, does not fall below 10 until Bill would have turned age 81. In sum, Chelsea has a decision to make: either postpone taking any distribution from the IRA that she inherits from Bill until the 10^th anniversary of Bill’s death, but taking all of the balance of that IRA at that time as taxable income, or alternatively she can take distributions ratably from Bill’s IRA over 15 years, but she must annually take the required minimum distribution under the as-least-as-rapidly-distribution rule.

Conclusion: This is probably the easiest of the ‘typical’ IRA beneficiary designation situations to understand when dealing with the SECURE Act’s 10-year distribution rule. Only when the IRA owner is age 72 (or older) does a choice exist for the beneficiary: either take distributions over the next 10 years or ratably over the IRA owner’s remaining life expectancy.