New RMD rules when the IRA owner died prior to 2000

[Guest Sarah Brenner]

Do the new rules for calculating RMDs apply to distributions to beneficiaries when the IRA owner died before 2000? I was under the impression that they did, but have heard that there are some people who think they don't.

[BPickerCPA]

It is my understanding that they do. This is from IRS people in Washington.

[Bruce Steiner]

Barry: have you changed your view on this? Prop. Treas. Reg. § 1.401(a)(9)-1 Q&A 2 says that the distribution rules apply to all benefits in existence on or after 1/1/85, and the new proposed regulations apply for purposes of determining required minimum distributions beginning in 2002. The preamble says taxpayers may rely on the new rules for 2001. But you were the one who raised the question as to whether the new rules applied to beneficiaries of participants and IRA owners who died before 2000.

Perhaps the IRS will clarify this before the end of 2001, so beneficiaries will know how much they have to withdraw this year.

[BPickerCPA]

Bruce,

I must have been sleeping when I answered the question. I must have thought it said "death in 2000".

According to the people in Washington, the new rules do NOT apply if death was BEFORE year 2000.

As you say, Bruce, this could change in the final regs.

[BPickerCPA]

Bruce,

To expand on the previous reply --

I spoke to people in Washington because I wanted to get the "right" answer for my new book, "Barry Picker's Guide to Retirement Distribution Planning". I was told that the new laws will not apply to beneficiaries when death was before 2000, but I suspect that there will be a change in the final regs. No basis for the belief, just a gut feeling.

The problem is that there are various scenarios, and I don't think each one was considered.

Scenario 1: Death in 1999, after the RBD, no beneficiary, recalculation - The account should have all been paid by the end of 2000, so the point is moot.

Scenario 2: Death in 1999, before RBD, no distribution taken in 2000 - Old law puts you into five year rule, new law will not give you relief.

Scenario 3: Beneficiary changed between date of date in 1999 and 12/31/00, either because of payout (e.g. of a charity) or a disclaimer. Beneficiary is stuck with a faster payout than if he could use his own life - I believe here too the bene is stuck with old law. Old law looked at bene at time of death, new law will not give relief.

Scenario 4: H named W as bene on RBD, elected term certain. W dies and H names child. H dies in 1999, with child as bene. Child has to take distribution over remaining term certain of H and W - this is the only scenario where I think the IRS MIGHT allow the bene to use the new law, by allowing him to now switch to the remaining years in his own life.

CAVEAT: The above is NOT law, it is only my opinion, not worth the bytes it's written on.

[Guest reg_h2b]

Barry, I too talked to the Service about Scenario 3 and got the same answer: no decision yet... after the June 2001 MRD conference/final regs they will be able to answer.

I tend to agree with your speculation though: I doubt that the new regs change the bene established pre-2001.

However, even assuming the bene is set, the new reg's life exp. table does apply prospectively in the case you gave in Scenario 3. Agree?

On another subject, it was also uncertain what "payout" or "cashout" is? Is a sps rollover a cashout? Is a mutiple bene IRA split-up after death in FBO bene accounts a payout (ie each bene can use their own exp life)? The people I talked to had not come to any final conclusions. Did you hear the same?

[BPickerCPA]

The people I spoke to said that a split of the account after death is exactly what is anticipated, and that each bene can use his/her own life expectancy.

A payoff to the spouse is a cashout, and she is no longer a bene. The remaining bene is then the designated bene on the 12/31 of the year after the year of death. This is true even if the spouse rolls her distribution over to her own IRA.

[Bruce Steiner]

Scenario 4 is the one I had in mind. It could make a big difference if child could use his/her life expectancy, rather than his/her parents' life expectancies.

Even if child were the beneficiary from the start, the calculation is more favorable under the new rules, though the difference is not as great as in Scenario 4.

[Appleby]

Barry you are right. If the participant died in 2000, the new rules DO apply to the beneficiary, as they have until 12/31/2001 to takes the necessary steps that will determine their post death distributions. For example, Assume that participant is over 70 ½ and died 2000. Assume also that there are multiple beneficiaries on the IRA. If the assets were separated into individual inherited accounts for the beneficiaries by December 31,2001, they would each be allowed to use their own life expectancies. The disclaim and cash out rules also applies in this case.

The only unclear issue, is if the participant died 1999 or before- do the new rules apply to his/her beneficiaries