When an IRA owner dies, we look to the beneficiary form to determine who should receive the IRA funds. After death, there is a transition process as assets are moved into an inherited IRA for the beneficiary. But what if the beneficiary dies after the death of the original IRA owner, but prior to claiming the account? After all, it can be well over a year before any action needs to be taken by the beneficiary. A lot could happen in that time. Are the IRA dollars now suddenly in limbo with no owner? Are there any protocols or rules to follow in such a scenario?
In fact, determining how the IRA is to be distributed when the beneficiary dies before claiming the account is clear. The assets do NOT go to the contingent beneficiary. If the original IRA owner named contingent beneficiaries on the beneficiary form, those names are null and void if the primary beneficiary is still alive when the owner dies. Assuming the primary beneficiary does not disclaim any portion of the IRA, the names on the contingent line become meaningless. The moment an IRA owner dies, the primary beneficiary is immediately deemed to be the new owner of those assets.
During a normal transition period, the beneficiary determines what options she has. Is she a spouse who can do a spousal rollover into her own IRA? Does she want to take a lump sum distribution? Is she eligible to stretch required minimum distribution (RMD) payments? Does the 10-year rule apply? Additionally, if the beneficiary is establishing her inherited IRA, she will name her own beneficiaries (successor beneficiaries) on a fresh beneficiary form.
However, if this first beneficiary dies prior to claiming the inherited dollars - and prior to naming a successor beneficiary – there are definitive “next steps” to follow:
Example: John, age 75, has a traditional IRA. He dies with his sister Kathy as his primary beneficiary and Kathy’s children (John’s nephews) named as contingents. Kathy, age 72, qualifies as an eligible designated beneficiary (EDB) because she is not more than 10 years younger than John. Eight months later, before completing any paperwork to claim the account, Kathy dies. The assets do NOT pay to the contingent nephews. Kathy, as an EDB, is deemed to have created an inherited stretch IRA. The custodial document identifies her estate as default beneficiary. An estate-owned inherited IRA is established. Since Kathy was an EDB and allowed to stretch RMD payments, the estate, as successor, receives a fresh 10-year rule. RMDs are due in years 1 – 9 based on Kathy’s single life expectancy, and the estate-owned account must be emptied by the end of year 10.
By Andy Ives, CFP®, AIF®
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.