Two-and-a-half years ago, a decedent died, owning an individual retirement account. At the time of her death, the decedent had reached her required beginning date for distributions. She didn’t name a beneficiary of her IRA at the time of her death, and as such, her estate became the IRA’s sole beneficiary. The decedent left a will in which she named the administrator of her estate and three individuals as her beneficiaries. None of the four individuals was a surviving spouse of the decedent.
The administrator wanted to divide the IRA into four equal shares through four trustee-to-trustee transfers, thereby creating four inherited sub-IRAs. Required minimum distributions (RMDs) would be made from the IRA up until the administrator created the four sub-IRAs; after that time, each sub-IRA would make distributions pursuant to the RMD rules of Internal Revenue Code Section 401(a)(9), based on the decedent’s remaining life expectancy.
Four Requests, Four Answers
The administrator requested rulings on four issues. In Private Letter Ruling 201318033 (Feb. 7, 2013), the Internal Revenue Service answered as follows:
1. Can each beneficiary’s interest be segregated and held in a separate, inherited sub-IRA to determine the RMD under IRC Section 401(a)(9)?
Answer: Yes. Treasury Regulations Section 1.401(a)(9)-8, Q&A-2(a)(2) provides that the interests of distinct beneficiaries can be divided into separate, segregated accounts, as long as all post-death investment gains and losses from the period prior to establishing such separate accounts are allocated on a pro-rata basis in a reasonable and consistent manner.
2. Does each sub-IRA, created through trustee-to-trustee transfers and titled “Decedent [E] deceased IRA f/b/o [a specified beneficiary],” constitute an inherited IRA under IRC Section 408(d)(3)?
Answer: Yes. Each sub-IRA constitutes a distinct beneficiary interest in the IRA. Each sub-IRA is being maintained for the benefit of each beneficiary, who acquired the sub-IRA by reason of the decedent’s death. Under IRC Section 408(d)(3)(C)(ii), therefore, each sub-IRA is an inherited IRA.
3. Can each RMD be met by distributing amounts equally from each sub-IRA, using the decedent’s remaining life expectancy as determined by her age as of her birthday in the year of her death, reduced by one for each subsequent year in accordance with Treasury Regulations Section 1.401(a)(9)-5, Q&A-5?
Answer: Yes. If an IRA participant dies without naming a designated beneficiary after her required beginning date, the applicable distribution period to calculate RMDs after the calendar year of a participant’s death is her remaining life expectancy, using her age as of her birthday in the calendar year of her death (Treas. Regs. Section 1.401(a)(9)-5, Q&A-5(a)). Under Treas. Regs. Section 1.401(a)(9)-5, Q&A-5(c)), in subsequent calendar years, the distribution period is reduced by one for each calendar year that elapses, after the calendar year of the participant's death.
4. Will the transfer of each beneficiary’s one-fourth interest in the IRA to each beneficiary’s sub-IRA constitute a distribution under IRC Section 408(d)(1) or constitute an attempted rollover from the IRA to each sub-IRA?
Answer: No. Revenue Ruling 78-406, 1978-2 C.B. 157, provides that a direct transfer of funds from one IRA trustee to another doesn’t result in a payment or distribution of the funds for purposes of Section 408(d)(1), regardless of whether a bank trustee initiates the transfer or the participant directs it. Rev. Rul. 78-406 also states that a transfer from one IRA bank trustee to another, even if directed by a participant, isn’t a rollover contribution to the recipient IRA because the funds aren’t within the participant’s direct control and use.