There are non-tax reasons to create separate trusts for beneficiaries:
- Individual Life Expectancies Can Be Used.
- Avoid Beneficiary Disagreements.
- Maintain Separate Investment Strategies by Beneficiary.
- Beneficiaries Have Option to Choose Separate IRA Custodians.
- Special Needs of Certain Beneficiaries.
The question is, if you have three beneficiaries, should you divide your IRA into three accounts now, or allow it to be handled post-death? Unless you like getting three statements and needing to make three transactions every time you want to make a change to your IRA, just make sure that the parties involved understand that the account should be divided later.
In most cases, it would be best that each beneficiary be able to use his or her own age for computing the RMD on the inherited IRA. This way if one beneficiary is 20 years old and another beneficiary is 50 years old, the 20-year old would not be forced to use the life expectancy of a 50-year old. Separate accounts for each beneficiary can be created after the death of the IRA owner to solve this problem.
Beneficiaries have until December 31st of the year following the year of the IRA owner’s death to split the inherited IRA and create separate accounts.
But there is another rule that states that the identity of the designated beneficiary for calculating post-death RMDs is determined on September 30th of the year following the year of the IRA owner’s death.
If at September 30th of the year following the year of the IRA owner’s death, there are still three beneficiaries on the IRA, then it would seem that the designated beneficiary would be the oldest or the one with the shortest life expectancy, or there would be no designated beneficiary if one of the three beneficiaries was an estate or a charity.
The regulations, however, do not require the IRA to actually be split until December 31st of the year following the year of the IRA owner’s death. This means that if an IRA owner names three children as co-beneficiaries on an IRA, they can each still be the designated beneficiaries on their separate shares if the account is split after the September 30th beneficiary designation date but before the end of the year.
For example, if the IRA owner died in 2004, separate shares for RMD purposes can be created even if the account is split after September 30, 2005, as long as the IRA is split by December 31, 2005. Does this mean that the designated beneficiary can be determined as late as December 31st of the year following the year of death? No. The only explanation then, for the two dates is that September 30th is the date that the designated beneficiary is determined and December 31st is merely an administrative date by which the actual split must be done. To be safe they should split by the September 30th date. That still gives the beneficiaries plenty of time.
To add to the confusion, the account technically does not have to be split into several different physical IRAs to create separate shares. If beneficiaries are willing to account for post-death gains and losses on their separated inherited amounts in a single IRA, that could also qualify as creating separate shares without physically splitting the IRA into separate accounts. However, this will create an ongoing paperwork nightmare. If beneficiaries desire separate shares, they should physically split the inherited IRA in a timely fashion.