Take-Away: The SECURE Act changed distributions for many successor beneficiaries, depending on when the designated beneficiary of the inherited IRA dies. As time passes, the new successor beneficiary distribution rules will apply to more individuals, perhaps subjecting them to an even shorter distribution period than the SECURE Act’s 10-year payout rule.

Background: A successor beneficiary is the named beneficiary of a designated beneficiary, i.e. the person initially named by the IRA owner who inherited the IRA names a successor beneficiary. When the IRA was initially inherited is not important. Rather, it is when the designated beneficiary dies that controls distributions to the successor beneficiary.

Pre-SECURE Act Distribution Rule: Before the SECURE Act became the law, the successor beneficiary ‘stepped into the shoes’ of the designated beneficiary. Consequently, if the designated beneficiary was taking stretch distributions from the inherited IRA using his or her life expectancy to determine their required minimum distribution (RMD), the successor beneficiary could continue taking RMDs using the deceased designated beneficiary’s life expectancy to calculate required minimum distributions from the inherited IRA. 

Example 1:  Alex dies in 2019. He names his daughter Gloria as the designated beneficiary of his IRA. Gloria has a life expectancy of 50 years at the time of her father’s death. Gloria starts taking RMDs from the inherited IRA using her own life expectancy. Gloria shortly thereafter dies in an auto accident. Gloria names her son, Mike, as the successor beneficiary of her inherited IRA (from Alex.) Mike ‘steps into the shoes’ of his mother Gloria; Mike continues to take stretch distributions using his deceased mother’s life expectancy.

Example 2: Alex dies in 2019. He names his daughter Gloria as his designated beneficiary. Gloria names three successor beneficiaries of the inherited IRA: one-third to her husband Mike, one-third to her disabled daughter Patty, and one-third to her minor son, Ian. Gloria dies in an auto accident. Each of the three named successor beneficiaries ‘step into Gloria’s shoes’ and they may continue to use Gloria’s remaining ghost life expectancy to calculate their required minimum distributions from their respective share of the inherited IRA. 

Post-SECURE Act Distribution Rule: With the SECURE Act, if the designated beneficiary dies in 2020, or in future years, the successor beneficiary is subject to the SECURE Act’s 10-year distribution requirement. As with all other distributions under the SECURE Act [other than for eligible designated beneficiaries] there is no longer an annual RMD to contend with, just the rule that the entire inherited IRA must be distributed by the end of the 10th year after the death of the IRA owner. 

Successor Beneficiary Trumps Eligible Designated Beneficiary Status: While the SECURE Act created the category of eligible designated beneficiary [surviving spouse beneficiary, disabled or chronically ill beneficiary, minor child of the IRA owner, and beneficiary who is less than 10 years younger than the IRA owner] that special classification does not apply when named as a successor beneficiary.

Example 3: Following Example 2, if Gloria died in 2020, then Mike must empty his share of the inherited IRA for which he was named as Gloria’s successor beneficiary in the following 10 years.  The same with Patty (a disabled individual) and Ian (Gloria’s minor child.) This may come as a surprise to many who are only now starting to work with the eligible designated beneficiary classifications under the SECURE Ac. While Mike (surviving spouse), Patty (disabled beneficiary) and Ian (minor child) would all be eligible designated beneficiaries under the SECURE Act, they are not entitled to stretch distributions using their own life expectancies. Rather, they are merely successor beneficiaries and each is subject to the SECURE Act’s 10-year distribution limit. Had the IRA been established and owned by Gloria, each of Mike, Patty, and Ian would have been eligible designated beneficiaries entitled to use their own life expectancy to calculate their required minimum distributions from the inherited.

Limited Exception: One very limited exception is with regard to when the successor beneficiary is the surviving spouse and is not limited by the 10-year distribution rule. This would be if the surviving spouse chooses to keep the IRA as an inherited IRA. If the spouse-designated beneficiary dies before the deceased spouse would have attained age 72, then the spouse-beneficiary’s own beneficiary is treated as if he or she inherited directly from the original IRA owner (and he or she will not be treated as a successor beneficiary.)

Grandfather Rule- Deaths Before 2020: As noted above, designated beneficiaries and successor beneficiaries who inherited IRAs prior to the enactment of the SECURE Act and who are currently receiving stretched RMDs are grandfathered. These stretched distributions from the inherited IRA can continue until the designated beneficiary or successor beneficiary dies. On the later death of the designated or successor beneficiary, if any assets remain in the inherited IRA, the SECURE Act’s 10-year payout rule kicks in. This grandfather rule thus turns on the death of the designated beneficiary: death before 2020 permits the continued ‘step in the shoes’ stretch distribution period, while death in 2020 or later years results in the flat 10-year distribution rule.

Eligible Designated Beneficiaries: Only one stretch RMD period permitted. It is reserved for the (i) initial designated beneficiary  (ii) who is an eligible designated beneficiary. Once the 10-year distribution period is initiated, the final payout date for the inherited IRA is locked in. Future successor beneficiaries of an inherited IRA do not get to start their own 10-year payout period. IRC 401(a)(9)(H) provides:

“If an eligible designated beneficiary dies before the portion of the [IRA owner’s] interest to which this subparagraph applies is entirely distributed, the exception under clause (ii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.”

The ‘exception to clause (ii)’ language allows stretch distributions to an eligible designated beneficiary. Accordingly, the exception ‘shall not apply to any beneficiary of such eligible designated beneficiary’, means the 10-year distribution rule applies even to an eligible designated beneficiary when he or she is a successor beneficiary.

  • Example 4: Ward dies in 2021 and leaves his IRA to his son Ross. Ross is age 55. Ross is not an eligible designated beneficiary. Accordingly, Ross cannot stretch distributions from the inherited IRA. Ross must ‘empty’ the inherited IRA within 10 years of Ward’s death. Ross dies five years after Ward. Kristen is Ross’ successor beneficiary. Kristen is chronically ill. Nonetheless, Kristen must continue the original 10-year payout started by Ross. That means that Kristen must take the final distribution from Ward’s IRA that her father Ross inherited by December 31, 2031. Even if Kristen was disabled or chronically ill, she (along with Ross) is subject to the SECURE Act’s 10-year payout rule. Kristen’s receipt of the inherited IRA within 10 years of Ward’s death could jeopardize Kristen’s entitlement to receive governmental benefits as a chronically ill individual.

Conclusion: When the original beneficiary of an inherited IRA first took ownership of the IRA is irrelevant. What matters in applying the successor beneficiary distribution rules is the date on which that previous beneficiary died. Once the 10-year IRA distribution period commences, the successor beneficiary ‘finishes’ that 10-year distribution period. A successor beneficiary does not start anew another 10-year distribution period, even if that beneficiary satisfies the statutory definition of an eligible designated beneficiary. So we now have different distribution rules for: (i) non-designated beneficiaries, e.g. non-persons, which is no more than 5 years; (ii) designated beneficiaries, which is 10 years; (iii) eligible designated beneficiaries, which permits stretch distributions using their life expectancies (but only so long as the beneficiary is a minor or only so long as the beneficiary meets the statutory definitions of disabled or chronically ill; and (iv) successor beneficiaries, who can finish the designated beneficiary’s 10-year distribution period. Do we really think the SECURE Act made IRA distributions simple?