Advanced Underwriting Consultants

Ask the Experts – January 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have a client who died in 2013 leaving his IRA to a complex trust as the named beneficiary. My client turned 90 years old in 2013, and so his 2013 RMD was based on a life expectancy of 11.4 years. Would the trust meet RMD requirements if it receives distributions based on the 11.4 life expectancy at death (meaning that for the next year, the divisor would be 10.4 and so on)?

Answer: No—the complex trust has quicker RMD requirements than the decedent.

RMDs during one’s lifetime are based on a distribution period that is generally determined using the Uniform Lifetime Table. The uniform life expectancy of someone your client’s age (90) is 11.4. Since he died in 2013, the RMD for 2013 is based on his uniform life expectancy of 11.4.

However, for an IRA with someone other than an individual named as the beneficiary, RMDs for the years after the owner’s death are based on the owner’s life expectancy using Single Life Expectancy Table. The single life expectancy of your client in the year of his death (age 90) is only 5.5 years. Therefore, the RMD for 2014 will be the IRA account balance divided by 4.5 (5.5 – 1). For 2015, the RMD will be 3.5, and so on.

Let’s say your client’s IRA account balance was $22,800 as of December 31, 2012. Using the Uniform Lifetime Table, the life expectancy of someone his age (90) is 11.4 years, and therefore his RMD for 2013 is $2,000 ($22,800 ¸ 11.4). If he had not done so yet, the trustee is required to distribute this amount to the trust.

If the IRA account balance was $22,500 at the end of 2013, the RMD for 2014 would then be $5,000 ($22,500 ¸ 4.5).

The excess of the RMD over the actual distribution will be subject to a 50-percent excise tax.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.