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George F. Bearup, J.D. Senior Legal Trust Advisor

20-Sep-22

The Year of Death RMD: Some Helpful IRS Leniency

Take-Away: Multiple beneficiaries of an inherited IRA can allocate among themselves the decedent’s final required minimum distribution (RMD) if it was not taken before death by the account owner. Missing the decedent’s final RMD is not the problem it once was, due to a recent change in IRS policy.

Background: Once an IRA owner turns age 72 years, that individual normally is required to take a required minimum distribution (RMD) from their IRA. The only exception is if the employee-participant is still working, in which case no RMD is required to be taken from the participant’s qualified plan account, e.g. a 401(k) account. Once begun, RMDs must be withdrawn annually each calendar year. The failure to take an RMD results in a pricy 50% excise tax. If the IRA owner dies prior to taking all of their RMD for the year of their death, the balance of the RMD must be taken that year by the designated beneficiary of the decedent’s retirement account. In short, there is no reprieve from taking an RMD just because the retirement account owner dies. The responsibility to take this final RMD  falls to the IRA’s designated beneficiary, who must include this final RMD in his/her taxable income for the year. While these are the basic rules associated with a decedent’s final RMD, there is often a fair amount of confusion when implementing the rules. Key points to consider follow:

  1. December 31 Deadline: The deadline for taking the decedent’s final year-of-death RMD is December 31 of the year of death. Not the following year’s December 31. If the IRA owner dies late in the calendar year and has not yet taken their RMD, there is a likelihood that the year-of-death RMD will be missed.
  2. Automatic Extension: Since missing a decedent’s final RMD was a common problem, the IRS recently created an extension for the missed year-of-death RMD. The 50% excise tax is waived if the year-of-death RMD is taken by the designated beneficiary’s tax filing deadline, including extensions.

Example: Ned, age 80, owns a traditional IRA. Ned named his daughter Beth as the designated beneficiary of his IRA. Ned’s annual RMD is normally scheduled to be paid to him on December 10 of each year by his IRA custodian. Ned dies on December 1 of this year. Beth will be responsible for taking Ned’s 2022 RMD. However, dealing with Ned’s death, making funeral arrangements, etc. Beth overlooks taking Ned’s final RMD for 2022 by December 31, 2022. Beth is eligible for the IRS’ automatic waiver of the 50% excise tax if Beth takes Ned’s 2022 final RMD by her 2022 tax filing deadline, i.e. April 15, 2023, plus any tax filing extensions that Beth may take.

  1. Normal Process- Single Beneficiary: An IRA custodian will normally open an inherited IRA in the name of  the designated beneficiary first, transfer all IRA assets to the inherited IRA, and then pay out the year-of-death final RMD from that inherited IRA to the designated beneficiary. IRS Form 1099-R will be issued to the designated beneficiary, which will include the beneficiary’s social security number (or tax id number) and which will be coded as a ‘death distribution.’ Consequently, the final RMD amount will be reported on the designated beneficiary’s Form 1040 income tax return, not the decedent’s estate’s income tax return.
  2. Multiple Beneficiaries: If multiple beneficiaries are named as designated beneficiaries of the decedent’s IRA, the IRS does not care who among the beneficiaries will take and report the decedent’s final RMD amount. That amount just needs to be taken by someone as part of their taxable income for the year.  If there are multiple designated beneficiaries of the inherited IRA, they may elect to divide the year-of-death final RMD equally, or one designated beneficiary may choose to take a lump sum payout that can satisfy the decedent’s final RMD entire obligation if the lump sum distribution is large enough. The same could also be the case with regard to a charitable designated beneficiary if the charity was part of the IRA’s multiple designated beneficiary group. Usually when  a charity is named as a designated beneficiary, it will take a lump sum distribution asap. Accordingly, if the charity’s portion of the inherited IRA is large enough, the lump sum distribution to the charity will satisfy the decedent’s full year-of-death final RMD, even though the charity is a tax-exempt entity that does not pay income taxes.

Conclusion: There are plenty of things to distract designated beneficiaries when there is a death in the family, e.g. grieving the loss of a loved one; planning a funeral or other memorial service; updating estate planning documents, etc. Accordingly, with all of these important distractions, it is easy to overlook taking the decedent’s final RMD. Fortunately, the IRS with its automatic extension rule,  has made it much easier to avoid the 50% excise tax for the failure to take a final RMD.