IRS Final Regs on Missed Year-of-Death RMDs

by Prof. Robert Bloink and Prof. William H. Byrnes

The IRS’ final regulations governing post-SECURE Act RMDs provide clarity in many areas when it comes to inherited retirement accounts. One section of the regulations addresses the complicated issues that can arise when a retirement account owner dies without yet taking their required minimum distribution (RMD) for the year. Under prior law, the rule wasn’t completely clear in situations involving multiple account beneficiaries or multiple accounts. The new regulations offer important clarity for beneficiaries who must take the decedent’s final RMD—albeit also providing rules that can be complex and potentially controversial. These new rules are important to beneficiaries across-the-board, regardless of whether they must take annual RMDs during the 10-year distribution period. They should also be considered by current account owners who are considering the timing of their current-year RMDs.

Multiple Beneficiaries and Multiple Accounts: Unpacking the New Rules

As an initial matter, the final regulations offer significant flexibility when an account owner names multiple beneficiaries. In these cases, when the original owner fails to take their full RMD prior to death, the beneficiaries can structure the RMD as they see fit.

In other words, the RMD can be distributed to any beneficiary. One single beneficiary could take the entire RMD or the RMD can be divided in any way among the multiple beneficiaries. Of course, this offers flexibility because these distributions are fully taxable—and beneficiaries may be in different tax brackets. It may be beneficial to allocate more of the RMD to beneficiaries in the lowest tax brackets.

Under prior law, many believed that each beneficiary was required to take their proportionate share of the total RMD, based on each beneficiary’s interest in the decedent’s retirement accounts.

The situation becomes more complex in cases where a decedent names multiple beneficiaries and also has multiple accounts. For example, assume a situation where an individual has two IRAs. If they wish to provide for multiple beneficiaries without each knowing what the other received, they could simply name different beneficiaries to different accounts.

The IRS has created a special rule for these situations. The special rule applies if (1) the original owner dies before taking their full RMD for that year, (2) had multiple retirement accounts and (3) the beneficiary designations with for all of those accounts are not identical.

In this case, each of the individual’s accounts must distribute an amount that is proportionate to the entire account balance. That’s true regardless of whether the original owner had taken part of their RMD for the year from one of the accounts.

For example, assume the decedent had two IRAs, one valued at $100,000 and the other at $25,000. The decedent leaves the $100,000 IRA to her two children and the $25,000 IRA to her two nephews. She had not yet taken her annual RMD when she passed away. Based on a total account balance of $125,000, 80% of the RMD must come from the $100,000 IRA and 20% from the $25,000 IRA.

It then becomes fairly easy for each beneficiary to calculate how much the others inherited. Because of this rule, clients with health issues or serious privacy concerns may wish to consider taking their RMD earlier in the year to reduce the risk that their account values and beneficiary choices will become generally known to all account beneficiaries.

Automatic Waiver for Beneficiaries

Account beneficiaries who failed to take the original account owner’s RMD by December 31 would have been subject to the 25% penalty for failure to take the RMD on time. Recognizing that beneficiaries who inherit accounts late in the year may face administrative and other difficulties, the final regulations retain the automatic waiver of the excise tax that applies in the case of an individual who had a minimum distribution requirement in a calendar year and died in that calendar year before taking their RMD.

The final regulations offer even more flexibility by extending the deadline for the beneficiary to take the missed RMD and be eligible for the automatic waiver. The new deadline is the later of (1) the beneficiary's tax filing deadline for the tax year that begins with or within the calendar year in which the individual died and (2) December 31 of the following calendar year.

Conclusion

Situations involving missed RMDs can quickly lead to steep penalties. It’s important for individuals who inherit accounts to work closely with competent tax and legal counsel in light of these new and often nuanced regulations.

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