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

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.

First, if the owner uses a pecuniary gift (such as “pay $10,000 to Beneficiary A and the balance of the account to Beneficiary B”), the IRA provider may not know whether to give the “pecuniary” beneficiary just the flat dollar amount or to give that beneficiary the dollar amount plus or minus gains or losses that accrue after the date of death. The IRA provider’s documents and policies should spell this out, but many do not.

Second, if the gift is truly a flat dollar amount, not adjusted for gains or losses occurring after the date of death, then that gift cannot qualify under the regulations as a “separate account”
(see above) for minimum distribution purposes. Thus, the beneficiary of the flat dollar gift and the beneficiaries of the “residuary” gift will be considered beneficiaries of the same account. Natalie B. Choate, Esq., Bingham McCutchen.

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When separate accounts are established with different beneficiaries, the “applicable distribution period” is determined for each separate account disregarding the other beneficiaries only if the separate account is established no later than December 31 of the year following the decedent’s death.⁵ If this deadline is not met, separate accounts can be established at any time, but the distribution period in effect prior to the separation of the accounts (generally the life expectancy of the oldest beneficiary) will continue to be applied.⁶

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Planning Point: If the foregoing requirements are not met (i.e., if separate accounts are not established by the deadline or to the extent the IRA proceeds were payable to one trust benefiting more than one individual), the IRA nonetheless may be segregated into separate IRA accounts, but the “applicable distribution period” will be the life expectancy of the beneficiary with the shortest life expectancy.⁷

If a trust is the beneficiary, separate account treatment is not available to the beneficiaries of the trust.⁸ Using the pre-2020 rules, the IRS has determined repeatedly that the establishment of separate IRA shares (i.e., creating separate IRAs titled in the name of the decedent for the benefit of the trust beneficiaries) did not entitle multiple beneficiaries of the same trust to use their own life expectancies as the distribution period.⁹ Where the trust established by the decedent to receive IRA proceeds included provisions for a subtrust benefiting the surviving spouse, the surviving spouse’s life expectancy was found to be controlling for all beneficiaries.¹⁰ In another instance, the IRS determined that where a father had failed to designate an IRA beneficiary, making his estate, which was left to his three children, the beneficiary, the decedent’s remaining life expectancy was controlling, although a subdivision of the IRA was permitted.¹¹ The fact that the trust meets the requirements for a “see-through trust” ( Q 3900) does not change this result.¹²

The IRS has privately ruled, however, that where separate individual trusts were named as beneficiaries, the ability of each beneficiary to use his or her life expectancy was preserved even though the trusts were governed by a single “master trust.”¹³

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For details regarding contingent and successor beneficiaries, as well as other special rules, see Q 3900.