3697 / Prior to the SECURE Act, what were the rules for determining required minimum distributions when there were multiple beneficiaries and separate accounts?

Editor’s Note: Beginning in 2020, non-spouse beneficiaries who do not qualify as eligible designated beneficiaries must generally deplete the account within 10 years of the original account owner’s death. Therefore, the life expectancy rules discussed below are no longer relevant unless the beneficiary qualifies as an eligible designated beneficiary (see Q ). Post-SECURE Act, proposed regulations provide that in situations involving multiple designated beneficiaries, the life expectancy of the oldest beneficiary will be used (rather than simply using the shortest life expectancy).

If more than one beneficiary is designated as of the determination date ( Q 3696), the beneficiary with the shortest life expectancy (i.e., generally the oldest) will be the designated beneficiary for purposes of determining the distribution period.¹

As an exception to the “oldest beneficiary” rule, if an individual account (including an IRA)² is divided into separate accounts (as defined below) with different beneficiaries, the separate accounts do not have to be aggregated for purposes of determining the required minimum distributions for years subsequent to the calendar year in which the separate accounts were established (or date of death, if later).³

For purposes of Section 401(a)(9), “separate accounts” are portions of an employee’s benefit (or IRA) representing the separate interests of the employee’s beneficiaries under the plan as of his date of death. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the accounts. Once separate accounts have been established, the separate accounting can provide for separate investments in each account, with gains and losses attributable to such investments allocable only to that account. A separate accounting also must allocate any post-death distribution to the separate account of the beneficiary receiving it.⁴

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Planning Point: When leaving an IRA to multiple beneficiaries, an owner may leave a fixed dollar (“pecuniary”) amount to one or more of them, with a “residual” gift to one or more other beneficiaries, or use “fractional”-type gifts for all beneficiaries. Although both methods are legal and acceptable, fractional gifts usually are preferable, for two reasons.