Separate Accounts - Tax Law Changes - Required Minimum Distributions - IRA Accounts - Beneficiaries

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Rule on Separate Accounts

Under the 1987 rules, if any of the beneficiaries had no life expectancy (such as a charity), a life expectancy could not be used for any of the beneficiaries in determining IRA payments.

For example, if the IRA owner names the Boy Scouts of America as a beneficiary of $1,000 of his IRA, and splits the rest of his IRA with his two children, because not all of the beneficiaries are individuals, a life expectancy could not be used when payments are to be made to the children.

The way to avoid this issue is to create separate accounts for each beneficiary. Under the old rules, the deadline for setting up the separate accounts was on or before the required beginning date. This old rule also applied to multiple beneficiaries of an IRA.

For example, an IRA owner names his wife and three children as beneficiaries of his IRA account. If separate accounts for each of these beneficiaries were not established before the required beginning date, after the IRA owner's death, the required minimum distributions to the beneficiaries must be based on the life expectancy of the oldest beneficiary, who most likely is the surviving spouse.

Under the new and final regulations for minimum retirement plans issued by the IRS on April 26, 2002, the deadline for determining the beneficiaries and setting up the separate accounts for after-death distributions is Sept. 30 of the calendar year following the year of death. This was done to allow plan administrators and custodians more time to calculate and distribute required minimum distributions. This also gives the beneficiaries time to create separate accounts so that each individual's life expectancy can be used. So, in the event one of the beneficiaries has no life expectancy (such as a charity), there is enough time to create separate accounts so that beneficiary life expectancies can be used.

According to the IRS, beneficiary accounts are deemed separate as long as investment gains or losses are allocated on a pro rata basis in a reasonable and consistent manner between accounts. One way to accomplish this is by establishing separate "inherited" accounts for each beneficiary.

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		See Also Distributions During the IRA Owner's Lifetime Distributions After the IRA Owner's Death