Separate Accounting and Its Effect on Beneficiary Options
By Alexis Gonzalez-del-Valle, CIP, CHSP
What is separate accounting?
Separate accounting is the allocation of subaccounts in an IRA that reflects each beneficiary’s separate interest in the IRA as of the date of the IRA owner’s death. If an IRA is divided timely into separate accounts, each beneficiary is treated as the sole designated beneficiary of their respective share of the IRA for purposes of calculating life expectancy payments—when that’s an option—and for purposes of allowing a spouse beneficiary to transfer his share of the decedent’s IRA to his own IRA.
How are IRA assets moved to separate accounts?
Once a financial organization creates separate accounts, it may transfer the assets from the decedent’s IRA into each beneficiary’s separate account. This would be a nonreportable transaction. The financial organization does not need the beneficiary’s permission, nor does the beneficiary have to sign any documents to establish the separate account. (Some financial organizations may request that a beneficiary complete a new beneficiary IRA document, but this is not vital to separate accounting.)
Is there a deadline to establish separate accounts?
The deadline to create separate accounts is December 31 of the year after the IRA owner’s death. Timely establishment of separate accounts may be important for beneficiaries wanting to take full advantage of their payment options, such as life expectancy-based distributions of their balance if they are eligible designated beneficiaries. If separate accounts are not established by the deadline, and there are multiple primary beneficiaries, knowing who is considered a designated beneficiary is important.
Who is a designated beneficiary?
A designated beneficiary is a primary beneficiary named (or a beneficiary by document default) as of the date of the IRA owner’s death who has a balance remaining in the account as of the “determination date.” The “determination date” is September 30 of the year following the year of the IRA owner’s death. Designated beneficiaries are primary beneficiaries with balances on the determination date, including primary beneficiaries who die during the period between the IRA owner’s date of death and the determination date. Primary beneficiaries who disclaim their benefits before the determination date, as well as primary beneficiaries who take a complete distribution of their benefits before the determination date, are not considered designated beneficiaries.
Why is knowing if a beneficiary is considered a designated beneficiary on the determination date important?
This determination may affect a spouse beneficiary’s ability to transfer the decedent’s IRA assets to his own IRA. If the spouse beneficiary is the sole designated beneficiary as of the September 30 determination date, the spouse beneficiary can transfer the decedent’s IRA to the spouse’s own IRA. The IRS has commented that a spouse beneficiary who is not the sole designated beneficiary of the entire IRA may still transfer his portion of the IRA to his own IRA if separate accounts are established timely (by December 31 of the year following the year of death). Regardless of whether separate accounting has been done, the spouse retains the right to distribute and roll over the decedent’s IRA to his own IRA.
Knowing the determination date also affects the distribution period for calculating beneficiary life expectancy payments. Separate accounts established by the deadline help determine life expectancy payments. If the IRA owner died before January 1, 2020, and separate accounts are established timely, each beneficiary generally may use his own single life expectancy to calculate life expectancy payments. If separate accounts are not established timely, all designated beneficiaries must use the oldest beneficiary’s life expectancy to calculate life expectancy payments.
If the IRA owner dies on or after January 1, 2020, only “eligible designated beneficiaries” may use their own life expectancies to calculate life expectancy payments if separate accounting is set up timely. If not, all eligible designated beneficiaries must use the oldest designated beneficiary’s life expectancy to calculate life expectancy payments. Beneficiaries that are not eligible designated beneficiaries must distribute the entire account balance within 10 years.
