The following is a synopsis of some of the rules relating to traditional IRAs which may be of interest to you:
Required Beginning Date (RBD). Named owners of traditional IRAs must begin to take required minimum distributions from their IRAs by April 1 following the year in which they turn 70 = -- the "required beginning date" (RBD). The RBD is also the date by which two very important choices must be made: (1) the method of calculating how the benefits -- the "required minimum distributions" -- will be distributed; and (2) the naming of beneficiaries. These choices have long ranging implications, and IRA owners should carefully consider these implications before they make their final decisions.
Calculation of Required Minimum Distributions. Named owners of IRAs can choose between two basic methods to calculate the required minimum distributions: (1) the term-certain method, and (2) the recalculation method. Generally speaking, the recalculation method will result in a longer payout period during the life of the owner and his or her spouse, but after their deaths, the full remaining balance in the IRA must be distributed to the beneficiary or beneficiaries by the end of the following year, putting an end to the tax deferral benefits of the IRA.
Designating Beneficiaries of IRAs. The person designated as the beneficiary (the "designated beneficiary") of an IRA serves two functions. The designated beneficiary is a person to whom the IRA benefits are payable at the death of the named owner, and in addition, the age of the designated beneficiary is used to determine over what period the required minimum distributions are to be paid out of an account.
If the named owner of an IRA is married on the RBD then more than likely that IRA owner will want to name his or her spouse as the beneficiary of the plan. This is the most common arrangement because a spouse has special rights as the beneficiary of an IRA that other beneficiaries do not have. If that is the case, then the required minimum distributions from the account will be determined using the joint life expectancy of the owner and his or her spouse under tables published by the Internal Revenue Service.
If the named owner of an IRA is not married on the RBD (or if the owner is married and chooses to name someone other than his or her spouse as the beneficiary of the IRA) then the age of the oldest named beneficiary will be used along with the age of the named owner for purposes of determining the require minimum distributions. The Internal Revenue Service prescribes that if two or more individuals are designated as beneficiaries, the designated beneficiary with the shortest life expectancy is the designated beneficiary for purposes of determining the required minimum distributions. The minimum distribution rules further prescribe that if a non spouse IRA beneficiary is more than 10 years younger than the named owner, the beneficiary will be treated as being only 10 years younger.
Distributions After Death of Named Owner. When and how distributions from IRAs must be taken after the death of the named owner depend on a number of factors, including whether the IRA owner has reached his or her RBD, whether a "designated beneficiary" was named, and whether the "designated beneficiary" is the spouse of the IRA owner, as follows:
If there is no "designated beneficiary," then the balance of the account must be distributed by the end of the year which contains the 5th anniversary of the date the owner died.
If the designated beneficiary of an IRA is the spouse of the named owner, then the spouse will have the option of rolling the account into an IRA in his or her name, or leaving it in the name of the deceased owner and having it paid out as if the named owner were still living.
If the beneficiary is not a spouse, and the named owner dies before his or her RBD, then the payout to the beneficiaries can be extended over the lifetime of the oldest named beneficiary (or over the lifetimes of each of the beneficiaries if the IRA is divided into separate shares).
If the IRA is not rolled over to the spouse and the named owner dies after the RBD, then the account must be paid out to the beneficiaries at least as rapidly as it was being paid out during the lifetime of the named owner.
If the named owner of the IRA uses the recalculation method to determine how distributions will be made after the RBD, and a spouse is not named as beneficiary, then the full remaining account balance must be distributed by the end of the year following his or her death and no further tax deferral will be available.
Remember that although the Internal Revenue Service rules allow extended payouts, not all institutions allow beneficiaries of IRAs to take advantage of the rules.
Remember also that although the Internal Revenue Service rules may allow beneficiaries of IRAs the option of retaining the IRA accounts they inherit over an extended period of time, not all beneficiaries will understand or appreciate the value of the extended deferral, and may withdraw part or all of the IRAs prematurely.
Separate IRAs or Separate Shares. To facilitate each beneficiary being able to take distributions over his or her own life expectancy when more than one person is named as the beneficiary of an IRA, the named owner can establish separate IRAs (one for each of the beneficiaries) or can direct in the beneficiary designation that a separate account or a segregated share be maintained for each beneficiary.
Trusts as Beneficiaries of IRAs. There are some relatively recent developments with regard to naming trusts as the beneficiaries of IRAs which are of interest. Under Internal Revenue Service rules, only individuals can be "designated beneficiaries" of IRA accounts, however, under certain circumstances the Internal Revenue Service will consider the beneficiary of a trust to be a "designated beneficiary." The following is a brief outline of the rules:
The Trust must be a valid trust under the laws of the state where it is established;
The Trust must be irrevocable at the death of the named owner of the IRA;
The beneficiaries of the Trust must be identifiable from the instrument; and
Documentation regarding the Trust must be provided to the plan administrator. If the named owner is living on the required beginning date-the RBD" (April 1 of the year after he or she reaches 70= -- the date on which a person must begin to take distributions from the IRAs), then this documentation must be provided by that date. If the named owner is not living on the RBD, then the documentation must be provided within nine months after the date of his or her death.
In order for a Trust to be treated as a "designated beneficiary" (either a trust for the benefit of a spouse or a trust for the benefit of children or other descendants) the named owner of the IRA must comply with the rules identified above by making sure that the plan administrator has the documentation required.
If you have any questions regarding how these rules affect your estate plan, and what the best options are for you and your estate, please feel free to contact me. I will be happy to discuss them with you.