When an inherited IRA has multiple beneficiaries, splitting the account into several separate accounts may result in significant tax and other benefits for each beneficiary. Beneficiaries may split an inherited IRA into separate accounts no later than the end of the year following the year of the decedent’s death. For beneficiaries who inherited an IRA from an IRA owner who died in 2009, the deadline for dividing the account is December 31, 2010.
If beneficiaries want to keep the IRA deferrals going as long as possible, the youngest beneficiaries of an inherited IRA are at a disadvantage. The required minimum distributions from the IRA are calculated based on the oldest beneficiary’s age. The oldest beneficiary has the shortest remaining life expectancy, and the distribution for each beneficiary is based on that shorter life expectancy. When the IRA is divided, each subaccount has a separate required minimum distribution based on the owner of that particular subaccount. The younger beneficiaries are then permitted to prolong the lives of their subaccounts. This planning technique has a profound effect when there is a large age difference between the oldest and youngest beneficiary.
Another advantage of dividing the inherited IRA is it allows each beneficiary to decide the investment strategy of his or her subaccount. In an undivided IRA, there is a risk that the multiple beneficiaries will disagree over how to invest the IRA.
When dividing an inherited IRA, in addition to being mindful of the time deadline, it is important to follow the rules for allocating gains and losses that occurred after the IRA owner’s death and before the division into subaccounts. Typically the post-death, pre-division gains and losses are allocated pro-rata among the beneficiaries, and then after the division each subaccount keeps its own separate accountings.
For more information, please contact Andrew Grau at 215-661-0400 or AGrau@HRMML.com.