Home / Insights / Required Minimum Distributions Part 3 – Death of IRA Owner

Required Minimum Distributions Part 3 – Death of IRA Owner

by | Mar 21, 2018 | Estate Planning & Preservation

Coauthored by Kristine M. Scott, Estate Planning Associate

We have discussed the basics of Required Minimum Distributions (RMDs) and how to use them to fund charitable giving. But what happens when a family member passes away owning an IRA?

While dealing with the death of a parent, the parent’s retirement account is the last thing on your mind. But careful thought should be given when a family member passes away with a retirement account, especially if that family member was already receiving RMDs at the time of their death. If not prudently taken care of, the consequences are costly.

The majority of IRA-related headaches involve year of death distributions and default beneficiaries.

Year of Death Distributions

If the deceased account owner was 70 ½ years or older at his or her death, he or she will have already started taking the RMDs. Despite their passing, the RMD for the year of death must still be distributed in the year of death to the account beneficiary.

For example, Greg dies at age 76 on November 13, 2017 and had not taken his RMD for the year 2017. The beneficiary of his IRA is his wife, Jennifer. Jennifer MUST take the 2017 RMD on or before the deadline (April 15 of 2018) or face a 50% penalty.

Thus, if you are the surviving spouse or other beneficiary of an IRA holder, you need to be aware that you might be required to withdraw the decedent’s RMD for the year in which he or she died.

Promptly calculating the amount of that RMD will require coordination between your financial advisors and attorney. The quicker this process is done, the less likely you are to run into problems and tax related penalties.

Default Beneficiaries

The fine print in the IRA agreements of a majority of financial firms contains default beneficiaries who will take if there is no living designated beneficiary. Because of this, it is extremely important for every IRA owner to designate contingent or successor beneficiaries during their lifetime.

Default beneficiary provisions provide who will receive the retirement account at the death of the owner when the owner has not named a beneficiary before his or her death or if the designated beneficiary, such as a spouse, has predeceased the owner. The default beneficiary is not always the person or persons the owner would have wanted to receive the account.

For example, Robert dies and leaves his IRA to his daughter, Darci. Darci dies without having named a beneficiary of the IRA she inherited from her father.

The IRA agreement provides that, in the absence of a beneficiary designation, the default beneficiary is the account owner’s spouse. However, Darci would not have wanted the IRA to go to her second husband Ed and would have instead wanted her children to receive the IRA at her death.

Further, under their prenuptial agreement, Ed waived any rights to retirement accounts. Had Darci known Ed was the default beneficiary, she would have named her children as the successor beneficiaries of the inherited IRA.

The situation with Darci above could have expensive consequences if her children decide to go to court to try to claim their mother’s IRA. To avoid this situation, it is critical that all IRAs, including inherited IRAs, have designated beneficiaries and successor beneficiaries to ensure troubles like this to do not occur.

If your spouse or other family member has recently passed and had a retirement account, save yourself the headache, time, and money. Make sure that your loved one’s IRA is properly and promptly dealt with to ensure a smooth transition during that otherwise difficult time.


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