3696 / Who is a “designated beneficiary” for purposes of required minimum distributions from an IRA?

The designated beneficiary need not be specified by name to be a designated beneficiary so long as that beneficiary is identifiable under the terms of the IRA as of the determination date.² For special rules governing contingent and successor beneficiaries, see Q 3904.

For lifetime distributions, the identity and age of the designated beneficiary does not affect the IRA owner’s distributions unless the sole designated beneficiary is a spouse more than 10 years younger than the owner ( Q 3686). After 2020, the beneficiary’s status is determined as of the date of death.

Under pre-2020 law, for purposes of after-death minimum distribution requirements, the final regulations required that a beneficiary determination be made as of September 30 of the year after the year of the IRA owner’s death (i.e., the determination date).³ This date was designed to provide ample time following the determination of the designated beneficiary(ies) to calculate and make the required distribution prior to the distribution deadline (i.e., the end of the calendar year following the owner’s death).⁴ Exceptions to the September 30 deadline applied if the account was payable as an annuity, or if a surviving spouse beneficiary died after the IRA owner but before distributions had begun.

An individual who was a beneficiary as of the date of the owner’s death, but who was not a beneficiary as of September 30 of the following year (e.g., because the individual disclaims entitlement to the benefit or because the individual receives the entire benefit to which the individual is entitled before that date) was not taken into account for purposes of determining the distribution period for required minimum distributions after the owner’s death.⁵

A disclaiming beneficiary’s receipt of a required distribution, prior to disclaiming the benefit, in the year after death, will not result in the beneficiary being treated as a designated beneficiary for subsequent years.⁶ In a private letter ruling, the IRS also determined that a post death reformation of a beneficiary designation form that had inadvertently excluded a decedent’s children was effective to create a “designated beneficiary.”⁷ The children had been omitted as contingent beneficiaries on their father’s beneficiary designation due to a mistake by a bank employee, and not due to their fault. The children were therefore allowed to set up inherited IRAs after their father’s death.

If a beneficiary is not an individual or a permitted trust, the IRA owner will be treated as having no designated beneficiary and the five year rule will apply ( Q 3688). An IRA owner’s estate may not be a designated beneficiary.⁸ This rule continues to apply even after the SECURE Act became effective in 2020.

Generally, only an individual (not an estate or a trust) may be a designated beneficiary for required minimum distribution purposes. For example, if an IRA owner fails to name a beneficiary on the beneficiary designation form and the IRA plan document provides that in such a case benefits are paid to the owner’s estate, the estate beneficiaries will be barred from using the 10-year or life expectancy method, and the five year rule will apply.⁹ However, when a trust is named as a beneficiary and the special requirements for a “see-through” trust are met ( Q 3907), the beneficiaries of a trust may be treated as if they had been designated as the beneficiaries of the IRA for required minimum distribution purposes (but not for purposes of “separate account treatment,” see Q 3697).

In general, a valid see-through trust must satisfy the following four requirements: (1) the trust must be valid under state law, (2) the trust must be irrevocable, or must become irrevocable upon the death of the original account owner, (3) the beneficiaries of the trust who are to be beneficiaries of the IRA must be identifiable from the trust instrument itself, and (4) relevant documentation must have been provided to the plan administrator in a timely manner.¹⁰ In this case, the life expectancy of the oldest of all trust beneficiaries will be used to determine the minimum distribution requirements that apply after the death of the original account owner.¹¹

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Planning Point: Prior to 2020, when multiple beneficiaries are involved, there may have been a benefit to establishing separate accounts ( Q 3697), when available, or removing certain beneficiaries (via a disclaimer or lump sum distribution) between the date of the owner’s death and the determination date (i.e. September 30 of the year following owner’s death), as the minimum distribution requirements were determined based on the beneficiaries who still held an interest in the account as of the September 30th date.

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For example, prior to 2020, if an IRA owner died naming a charity and owner’s son as equal beneficiaries, the son would have been prevented from using his own life expectancy to determine required minimum distributions if the charity (a non-individual) still held an interest in the IRA as of the determination date. However, if the charity received a distribution from the IRA in full satisfaction of its interest prior to September 30, son would be considered a sole designated beneficiary and could use his own life expectancy to determine required minimum distributions.