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Death and Qualified Accounts

By: Atty. Sam Collins

Required minimum distributions (RMDs) are minimum amounts you must take out of your own tax-deferred qualified retirement accounts (examples include: IRA, SEP IRA, SIMPLE IRA – for simplicity’s sake, we will just refer to any of these qualified accounts as IRA, since this is one of the most common).  For those that have reached the age of 72 after December 31, ’22, the beginning age for RMDs is 73. In IRS-speak, this individual is referred to as post required beginning date.  Failure to take out a minimum amount each year when past that date will result in penalties.  The RMD is not a fixed amount—each year a plan participant must take a larger percentage out of the account (value based on December 31 of prior year) as the participant ages.  These rules do not apply to Roth accounts.  In the original participant’s hands, a Roth IRA never requires a minimum distribution.  But failing to take an RMD from a traditional IRA can be costly. 

Death does not excuse failure to take an RMD.  When a person dies and they are post required beginning date, the RMD still needs to be satisfied.  If the participant took the RMD earlier that year prior to their death, then the successor trustees do not have to worry about satisfying it (on top of everything else they are doing to settle the estate).  If the RMD does not come out by December 31 of the current year, penalties can still be assessed.  Many IRA custodians actively help to ensure the RMD is removed from the decedent’s account—but not all!  

So, what if someone who is past the required beginning date dies later in the year, say October, November, or even December, and that person has not yet taken their RMD?  It is still due on December 31.  The IRA now needs to be administered, on top of having an obligation to remove the RMD.  In many cases determinations need to be made—for example, if the IRA were payable to the Family Trust as primary, spouse as secondary beneficiary, the successor trustees need to decide whether or not it is better for them to disclaim the asset and allow it to pass to the surviving spouse (spousal rollover).  This can take time.  Disclaimers need to be drafted, signed, and presented.  Paperwork needs to be completed.  In many cases, this can happen rather quickly, but sometimes there could be impediments to getting the company to release the funds.  One such example is if the participant lives in a state with inheritance taxes, and the company requires an inheritance tax waiver before doing anything with the IRA.  It may be many months before such a waiver can be obtained and cause the RMD to come out late.  (Our Illinois clients can relax regarding that example; we have an estate tax as opposed to an inheritance tax, and have no such waiver requirements.)

What can you do to make things a little easier?  For starters, if you are taking your RMD later in the year (October, November, December), move it up a month or two.  Take it mid-year or shortly thereafter.  Establish a regular schedule for taking the RMD, and for our married couples, make sure your spouse is aware when they are satisfied.  While our experience has shown that most companies are very accommodating to getting the RMD out in those first couple months while an administration is underway and we are in the claims process, some have more rigorous requirements.  If an RMD fails to occur during administration, there is a procedure to ask the IRS to waive the penalty, but it’s always better (and safer) to get the RMD out in advance.

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