Generally, if a decedent owned an Individual Retirement Account (“IRA”) during his or her lifetime, upon death, a myriad of rules exist governing the distribution of the IRA based on the beneficiary designations chosen. This article gives the basics of some issues involved with IRA distribution during estate administration, and serves to highlight the importance of involvement of legal counsel during this process.

REQUIRED BEGINNING DATE

The Required Beginning Date (“RBD”) is the date at which a person is required to take distributions from an IRA. The RBD is April 1 of the year after the owner of the IRA reaches 70 ½ years old. If the decedent had reached his or her RBD as of the date of death, it is imperative that any remaining minimum distribution (not already taken by the decedent), for the year of the decedent’s death is taken by December 31of the year of decedent’s death in order to avoid any penalties. This must be taken by the beneficiary of the account and not by the estate, unless the estate is the beneficiary.

If the decedent had not yet reached his or her RBD at the time of death, the decedent’s minimum distribution (based on his or her life expectancy in the year of his or her death) must be taken by December 31 in the year after his or her death to avoid any penalties.

SINGLE BENEFICIARIES

If a single individual is the named beneficiary of the IRA, the beneficiary may receive distributions based on his or her life expectancy as determined by the Single Life Table discussed in the United States Treasury Regulations.

MULTIPLE BENEFICIARIES

If multiple individuals are named the beneficiaries of the IRA, they all must use the oldest beneficiary’s life expectancy to calculate the required distributions. However, if the IRA benefit is split into “separate accounts” for the benefit of each individual beneficiary, the beneficiary of each separate account can receive his or her distributions based on his or her individual life expectancy, as determined by the Single Life Table. These separate accounts must be established by December 31 in the year following the decedent’s death. The IRA plan administrator will need to be contacted for more information regarding the establishment of “separate accounts” if this is applicable.

TRUST AS NAMED BENEFICIARY

Generally, if a trust is a beneficiary of the IRA, the benefits must be entirely distributed out of the plan within five years of the decedent’s death if he or she died before reaching 70 ½, or over the decedent’s remaining single life expectancy in the year of his or her death if he or she died after reaching 70 ½. However, if the beneficiary is a qualifying trust (as more particularly described below), the distribution rules differ. To be a qualifying trust, the trust must comply with Treasury Regulations Section 1.401 (a) (9)-4, A-5. These Regulations allow one to “look through” the trust instrument and treat the trust beneficiaries as though they had been directly named as beneficiaries in the IRA.

Therefore, if only one person is named the beneficiary of a qualifying trust, the benefits can be distributed over the life expectancy of that individual beneficiary, even though the trust is named as the beneficiary of the IRA.

If multiple individuals are named as the beneficiaries of a qualifying trust, the benefits can be distributed to each individual beneficiary over the life expectancy of the oldest beneficiary of the trust, even though the trust is named as the beneficiary of the IRA.

However, some IRA plan administrators allow one to completely “look through” a qualifying trust with multiple individual beneficiaries. In these cases, the plan administrators allow “separate accounts” to be set up for each individual beneficiary. This allows each individual beneficiary to take his/her benefits over his/her life expectancy, even though the trust was the IRA plan administrator to obtain more information on this possibility, if applicable.

While some plan administrators allow one to completely “look through” a qualifying trust with multiple beneficiaries, we do not believe this is the correct interpretation. Regulations Section 1.401(9)-4, A-5 (c) states that the separate account rules are not available to beneficiaries of a trust. Therefore, the two previous distribution options stated above generally must be followed.

QUALIFYING TRUST

A qualifying trust must meet the following requirements of Regulation Section 1.401(a)(9)-4, A-5 in order to allow one to “look through” the trust instrument and treat the trust beneficiaries as though they had been directly named as beneficiaries in the IRA.

1. The trust must be valid under state law.

2. The trust is irrevocable.

3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument.

4. Certain documentation must be provided to the plan administrator. If a “designated beneficiary” trust is named as beneficiary of the IRA, a list of the beneficiaries as well as a copy of the trust instrument must be sent by October 31 in the year after death.

5. All beneficiaries of the trust must be individuals.

SPOUSE AS SOLE BENEFICIARY

The Spouse is the sole beneficiary if the spouse, alone, will inherit all of the benefits if he or she survives the IRA owner. The fact that other beneficiaries are named as contingent beneficiaries (who will take is Spouse does not survive the IRA owner, or does not survive the IRA owner for some specified period of time) does not impair his or her status as “sole” beneficiary.

If the IRA is to be divided into “separate accounts” payable to different beneficiaries, then the test of whether the Spouse is the “sole beneficiary” is applied only to the separate account of which Spouse is the beneficiary.

For purposes of post-death minimum distribution rules, it is not essential that Spouse be the sole beneficiary at the time of the decedent’s death, only that Spouse is “a” beneficiary on the date of death, only that she is the sole beneficiary on September 30 of the year after the year in which the IRA owner died is called the “Designation Date.”

The Spouse can elect to treat the deceased spouse’s IRA as the Spouse’s own IRA as long as the election is made at any time after the IRA owner’s death, provided that the Spouse is the sole beneficiary at the Designation Date.

REQUIRED COMMENCEMENT DATE FOR SPOUSAL DISTRIBUTIONS

If the IRA owner dies on or after his or her RBD, the required commencement date for distributions to Spouse is December 31 of the year after the year of the IRA owner’s death.

If the IRA owner dies prior to his or her RBD, and the Spouse is the sole designated beneficiary, the annual distributions to Spouse over his or her life expectancy do not have to begin until the end of the later of: the year following the year in which the IRA owner died, or the year in which the IRA owner would have reached age 70 ½. In contrast, non-spouse beneficiaries must always commence the minimum required distributions by the end of the year after the IRA owner’s death.

DISTRIBUTIONS TO SPOUSE AS SOLE BENEFICIARY

During the Spouse’s lifetime, Spouse must take distributions over his or her life expectancy, recalculated annually; beginning in whatever year he or she is required to begin distributions (see above). The Spouse’s life expectancy is determined by using the single life expectancy table based on the Spouse’s age on his or her birthday in each year for which a distribution is required.