The Internal Revenue Code (IRC) allows that after the death of the account owner, the proceeds from an Individual Retirement Account (IRA) may be distributed to a single beneficiary, multiple beneficiaries, multiple trusts (each having one beneficiary), and multiple trusts (each having multiple beneficiaries). In the case of a trust with multiple beneficiaries, however, the length of the distribution period may not exceed the life expectancy of a single designated beneficiary.
Required Minimum Distribution Beginning Date
The federal law, IRC §401(a)(9)(A)(i) & (ii), governing IRA distributions requires that distributions to the account owner begin by a certain date.
In the case of a non-spouse designated beneficiary, distributions must begin by the end of the year following the account owner's death. If the designated beneficiary was the decedent's spouse, however, the designated beneficiary may delay such distributions until he/she is 70 1/2.
Distribution Period: Actual Life & Life Expectancy
Section 401(a)(9)(A)(ii) requires that the entire interest of the account owner be distributed over the actual life of the account owner and a designated beneficiary or "over a period not extending beyond the life expectancy of such [account owner] or the life expectancy of such [account owner] and a designated beneficiary."
Whose Life Expectancy? (Multiple Trust Beneficiaries)
In cases of multiple trust beneficiaries, and after the death of the account owner, distributions may not continue beyond the life or the life expectancy of the oldest beneficiary (designated beneficiary).
Section 1.401(a)(9)-8 of the Treasury Regulations sets forth "separate account" rules for separate IRAs that the permit distributions from each account without reference to the lives or life expectancies of any other beneficiaries. However, §1.401(a)(9)-5 states "the separate account rules under A-2 of §1.401(a)(9)-8 are not available to multiple beneficiaries of a trust with respect to the trust's interest in the employee's benefit."
Separate Account Rules & Trusts
Although §1.401(a)(9)-4 requires that only individuals, not trusts, may be designated beneficiaries for purposes of determining the timing of required distributions, neither the IRS nor the Treasury Regulations prohibit the posthumous splitting of an IRA into two accounts. In such cases, however, distributions may not continue longer than the life expectancy of the eldest surviving beneficiary.
This brief overview of some important considerations associated with posthumous IRS distribution timing is by no means comprehensive. Always seek the advice of a competent professional when making important financial and/or legal decisions.