Which RMD Payment Option to Use for IRA Beneficiary?

[Guest David Hammond CISP]

Hi Everyone,

Need some help on this actual circumstance.

A man elects prior to his first RMD to jointly recalculate both lives with his wife named as beneficiary on his IRA. Several years after payments are underway he changes his beneficiary to his son solely, even though his wife is still living. She is continued to be used in the RMD calcs as is required because she is older than the new beneficiary.

Eventually he dies with his son still sole IRA beneficiary and his wife (who was used in the RMD calculations) still alive.

For the remainder payments to the son beneficiary, are the

assumptions based on options available to his still living wife who has been used in the RMD calcs but not named as IRA beneficiary or based on options available using his son who is now actually the beneificary?

What changes occur (if any) if the wife should die during the remainder payments to the son?

Can RMD reform come soon enough?

But then it keeps me in business!

Thanks for any input.

David

[Mary Kay Foss]

Unfortunately the son continues to use the wife's life expectancy. The next question is whether the father had elected recalculation or not. If both spouse's lives were being recalculated, I believe that the son will be required to take all of the funds out by December 31 of the year after the spouse's death.

Ordinarily, clients don't know whether they've elected to recalculate or not. First you check with the custodian, if they don't know about the election; you read the plan document to see what the default is. If the plan document is silent and no one can find a specific election, the general default is to recalculate the lives of both spouses.

The life of a nonspouse beneficiary cannot be recalculated so obviously if the replacement beneficiary were older than the spouse, recalculation would not be a factor. I've never seen the situation where a change has been made from a spouse to a younger beneficiary that explained whether recalculation was still required or not.

The recent private letter rulings that have allowed life expectancies after death when the participant was using a single life indicate to me that someone in Washington has a heart. Will that continue after November?

[Guest bill mahoney]

Mary,

There have been 2 PLRs from the IRS that state we no longer have to wory about the recalculation trap for the beneficaries. They are PLR 199951053 & 200018057. They have stated that you can recalculate age for RMDs and still allow the name(d) beneficary to take the distributions over their life spans.

[BPickerCPA]

Unfortunately the PLRs in question do not apply to this fact pattern. Here, the wife is the beneficiary on the RBD, and is later replaced by the son. Since the son was NOT the bene on the RBD, his life is never a factor.

The change of bene to the son has NO effect for RMD purposes. While the husband and wife are alive, the RMD is based upon the recalculated joint life expectancy. When the husband dies, the son inherits the account as the bene. The RMD is then based upon the single recalculated life expectancy of the wife, for as long as she lives. When she dies, the account must be emptied by 12/31 of the following year.

[Guest John L. Olsen, CLU, ChFC]

Bill,

As Barry said, you're misreading those PLRs. They allow the beneficiary to continue using the UNEXPIRED Joint LE in effect as of participant's RBD. In both cases, beneficiaries were non-spouses, which means that beneficiaries' LEs could not have been annually recalculated for MRD purposes. Thus, the unexpired portion of the "term certain" period of beneficiaries' LE was still available at death of participant.

In this case, beneficiary as of RBD was participant's spouse, and facts state that BOTH life expectancies were being recalculated. As Barry states, son's LE was not and is not a factor in MRD calculations. Son will have to take entire balance by 12/31 following year of Mom's death.

This facts situation is a perfect example of why I DO NOT ADVISE CLIENTS TO ANNUALLY RECALCULATE BOTH LIFE EXPECTANCIES, unless the benefit of doing so is weighed against the potential tax cost [as in this case].

Generally, Joint Recalc is just not worth it, in my judgment.