17-Mar-21
The 10 Years Younger Eligible Designated Beneficiary
Take-Away: The SECURE Act carved out five categories of designated beneficiaries who continue to be eligible to take required minimum distributions using their own life expectancy. One of the five categories of eligible designated beneficiaries is when the designated beneficiary is less than ten years younger than the deceased IRA owner. That category of eligible designated beneficiary is apparently broader than previously reported to include older designated beneficiaries than the deceased IRA owner.
Background: The 2019 SECURE Act fundamentally changed required minimum distributions from inherited IRAs and qualified retirement plan accounts. As a generalization, the SECURE Act eliminated the stretch IRA for most designated beneficiaries and replaced it with a required 10-year from owner’s death distribution rule. The SECURE Act did, however, create five separate beneficiaries who can continue under the ‘old’ required minimum distribution rule (RMD) and use their own life expectancy to take distributions from an inherited IRA or qualified plan account.
Eligible Designated Beneficiaries: The five categories of designated beneficiaries who can inherit a decedent’s retirement account and take distributions from that inherited account over their life expectancy are:
- The decedent’s surviving spouse
- Disabled designated beneficiaries
- Chronically ill designated beneficiaries
- Minor children of the decedent (not the decedent’s grandchildren) but only until the child attains the age of majority, at which time the 10-year distribution rule then applies; and
- A designated beneficiary who is not more than 10 years younger than the decedent.
It is the last category, i.e. not more than 10 years younger than the decedent, that lends itself to some interesting results and interpretations.
Example #1: A few months back an example was provided where a brother Claude, age 40, died in an auto accident. Claude’s $500,000 IRA was made payable in equal shares to his two sisters, Abby and Betty who survived him. Abby was age 31 at the time of Claude’s death. Betty was age 30 when Claude died. Due to the SECURE Act’s definition of the eligible designated beneficiary as one who is not more than 10 years younger than the decedent, led to a strange result in distributions. Because Abby was less than 10 years younger than Claude, she is not obligated to take her portion of the inherited IRA share after Claude’s death ($250,000) over the next ten years; rather, Abby can take her required minimum distributions using her life expectancy, which is approximately 53 years . In contrast, because Betty is more than 10 years younger than Claude, she must take her share of the inherited IRA ($250,000) over the following 10 years after Claude’s death. The financial and tax impact on the two sisters is dramatically different just because there is a year’s difference in their ages.
Example #2: George, age 72, inherits an IRA from his brother Jeb, age 67. George is an eligible designated beneficiary. George can stretch his required minimum distributions (RMDs) from the inherited IRA over his life expectancy, which is about 14 years, not 10 years.
Example #2 can be confusing. The SECURE Act’s requirement is that the named beneficiary cannot be more than 10 years younger than the IRA owner. This definition includes those beneficiaries who are, in fact, older than the deceased IRA owner because they are not more than 10 years younger. The only requirement is that the designated beneficiary cannot be more than 10 years younger to be an eligible designated beneficiary. According to a recent IRS interpretation of this eligible designated beneficiary, there is no limitation on designated beneficiaries who are older than the deceased IRA owner.
Example #3: Using the same family members as in Example #1, assume that Betty dies, naming her older sister Abby and her older brother Claude as the beneficiaries of her $300,000 IRA. Both Abby and Claude have the opportunity to take their respective shares of Betty’s IRA over their life expectancies, as each is an eligible designated beneficiary. In Abby’s case, that is about 55 years. In Claude’s case, that is about 45 years, should they decide to take stretch distributions from their inherited IRAs.
Conclusion: This IRA interpretation may be of some help for those individuals who wish to name older parents, siblings, partners, or friends as the designated beneficiary of their IRA. Those individuals who are older than the deceased IRA owner will continue to be able to claim a stretch distribution from the inherited IRA using their own life expectancy.