December 31, 2017 is an important deadline for individuals who inherited an IRA from an IRA owner who died in 2016. Where there are multiple beneficiaries for the IRA, splitting up the account into several accounts no later than the end of this year can yield important tax and other benefits for each beneficiary.
Designating several beneficiaries for an IRA may put the younger one (or ones) at a disadvantage if they want to keep required minimum distributions (RMDs) as small as possible and keep IRA deferrals going for as long as possible. This is because, as a general rule, where there is more than one IRA designated beneficiary, the one with the shortest life expectancy (that is, the oldest one) is treated as the designated beneficiary for determining distributions
The oldest-beneficiary rule comes into play for determining RMDs after the IRA owner’s death. Regardless of whether the IRA owner died before or after his or her required beginning date, if the IRA owner was older than any of the beneficiaries, the remaining IRA balance at the owner’s death is paid out over the remaining life expectancy of the oldest designated beneficiary.
Post-Mortem Planning Solution
The beneficiaries can split up the IRA into separate accounts no later than the end of the year following the year in which the decedent died. Where an IRA is divided into separate accounts (i.e., subaccounts), the RMD rules separately apply to each separate account, effective for years after the year in which the separate accounts were created, or the IRA owner’s date of death, if later.