These things can give you a splitting headache…
In the case of an IRA, often it is desirable to split an account into two (or more) accounts in order to better accommodate a distribution plan upon the death of the primary owner of the account. This can be done prior to the death of the IRA owner, or it could be done after the death of the IRA owner, as long as it’s accomplished before the end of the year following the year of death.
Why is this important?
When an IRA is inherited by a non-spouse individual, that individual is required to begin taking distribution of that IRA, based either upon their own age or the age of the decedent. In most cases when the beneficiary is younger than the decedent, it is advantageous to stretch those payments out over the longer period of time.
If there is more than one beneficiary, unless the IRA is split, the Required Minimum Distributions will be based upon the attained age of the “designated beneficiary” – who is the oldest beneficiary as of September 30 of the year following the year of death.
If you’ve split the IRA into separate IRAs for each beneficiary, each titled as “John Jones, deceased, FBO Jane Brown” (probably not exactly like that because the names will be different in almost all cases), then the individual IRAs can be distributed according to the age of each individual beneficiary. The IRA must be split by December 31 of the year following the year of death.
Note: bear in mind that you don’t have to have the IRA split into separate IRAs for each beneficiary by September 30 of the year following the year of death – this is just the administrative date for determination of the designated beneficiary. In the event that the IRA is split into separate inherited IRAs by December 31 of the year following the year of death, then administratively the designated beneficiary of each separate IRA as of September 30 would be the individual “FBO” owner of the account.
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry. . Read more from this author
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What are the consequences of not re-titling the account F/B/O? Can you point me to a specific regulation or section of the code? Thanks.
Okay – I’ll assume you’re talking about an inherited IRA with only one non-spouse beneficiary… according to Publication 590, the non-spouse beneficiary can not roll over funds into an IRA of their own, but may “make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.” That covers the requirement of how the titling must be done if it is retitled.
As far as consequences for not retitling, I don’t believe there is a regulation that requires retitling – nor is there a time limit on when you must retitle. And things might be just fine if the beneficiary lives out his life and doesn’t die until Table I says he should. But you know about how mice, men and their best laid schemes “gang aft agley” sometimes…? (most of the time!) One reason in particular that I would think you’d want to retitle the account is so that you can designate your own beneficiaries – assuming that the custodian would not allow you to designate new beneficiaries on the original account.
Not sure if I’ve answered your question, @Joe. Hopefully I haven’t gang too far agley with my explanation…
[...] IRA Inheritance – Not Taking Timely Distributions Jul 18th, 2009 by jblankenship. Hello there! If you are new here, you might want to subscribe to the RSS feed for updates on this topic.Powered by WP Greet BoxA commenter from my post on splitting an inherited IRA sparked this particular post – his question was “What are the consequences for not re-titling an inherited IRA as F/B/O?” You can see my response to that specific question at the original article… [...]
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