Successor Beneficiaries: What Are Their Distribution Options?
By Kristiana Rodriguez
When an IRA owner dies, the assets are distributed to beneficiaries, whether named by the IRA owner or determined by IRA document defaults. This can sometimes be a complicated process for financial organizations. And further complications may arise when the original beneficiary dies, leaving the inherited IRA to a successor beneficiary.
Overview
A successor beneficiary is a beneficiary-of-a-beneficiary. In other words, when the primary beneficiary dies after the IRA assets have already been inherited, then the individuals named on the inherited IRA owner’s beneficiary designation form are the successor beneficiaries. If no successor beneficiaries are named, then the inherited IRA will be awarded to the default beneficiary named in the plan agreement (e.g., the deceased original beneficiary’s estate).
Successor beneficiaries can maintain the tax deferred status of inherited IRA funds, but their timeline to fully distribute the funds may differ from other IRA beneficiaries. The final RMD regulations, released in July 2024, clarified successor beneficiary distribution options created by the SECURE 1.0 Act and the SECURE 2.0 Act.
Financial organizations should establish policies on whether a beneficiary is allowed to name his own successor beneficiaries under the inherited IRA. IRS rules do not prohibit beneficiaries from naming a beneficiary for their inherited IRAs. But IRS rules do prohibit extending the IRA’s tax-deferred status beyond what is available to the original beneficiary. Financial organizations should examine their IRA documents to determine whether document language supports beneficiaries naming beneficiaries. If the primary beneficiary did not name beneficiaries before his death, the IRA assets should be distributed according to the plan agreement.
Getting the Right Information
An understanding of successor beneficiary options is important to ensuring compliance with IRS distribution requirements. You may be accustomed to asking the following questions when you learn that an IRA owner has passed away
What year did she die?
Was it before her required beginning date (RBD)?
What is the relationship of the beneficiary to the IRA owner?
You may be tempted to apply these same questions to successor beneficiaries. And while these questions do affect the options available to a successor beneficiary, the answers are still based on the original IRA owner and the original beneficiary. The relationship between the successor beneficiary and the original beneficiary is not relevant. For instance, a successor beneficiary that is the original beneficiary’s spouse does not have the same flexible beneficiary options that she would have if she were the original IRA owner’s spouse: a spouse successor beneficiary cannot treat the inherited IRA as her own or use her own single life expectancy, recalculated, for beneficiary distributions.
The questions most often asked when dealing with successor beneficiaries are
whose life expectancy do you use when calculating annual life expectancy payments, and
what is the 10-year period based off, the IRA owner’s or the original beneficiary’s date of death?
In most cases, the account must be distributed within 10 years. If the original beneficiary was a designated beneficiary (not an eligible designated beneficiary), the inherited IRA must be distributed by the successor beneficiary by December 31 of the year containing the 10th anniversary of the original IRA owner’s death. If the original beneficiary was an eligible designated beneficiary, the inherited IRA must be distributed by the successor beneficiary by December 31 of the year containing the 10th anniversary of the original beneficiary’s death.
NOTE: Any individual who is an original beneficiary of an IRA owner who died before 2020 is considered an eligible designated beneficiary.
Understanding the Distribution Options
The following scenarios illustrate how successor beneficiary distributions may differ, depending on when the deaths of the original IRA owner and original beneficiary occurred and their relationships.
Example: John, age 77, died on August 15, 2019. His son, Andrew, age 45, inherited his Traditional IRA. Andrew died on July 15, 2024, leaving his inherited Traditional IRA to his wife, Susan. Because John (the original account owner) died before January 1, 2020, and his beneficiary, Andrew, died after January 1, 2020, the beneficiary distribution option for Susan, the successor beneficiary, is to continue to distribute the same single life expectancy payments that Andrew, the original beneficiary, would have been required to take in years 1-9 based on Andrew’s life expectancy, nonrecalculated. Susan must also distribute the entire inherited IRA by December 31, 2034, which is the end of the 10th calendar year following Andrew’s death. Note that Susan could choose to distribute more than the minimum amount required each year. Beneficiaries should consider talking to a competent tax advisor when determining if they should take out more than the minimum annual required payment.
Example: LaVonne, age 65, died on March 13, 2021. Her spouse, Vernon, age 62, was the beneficiary of her Traditional IRA. He retained the assets in an inherited Traditional IRA and chose to delay taking life expectancy payments until the year that Lavonne would have reached her applicable RMD age. Vernon died on August 17, 2024, leaving the inherited IRA to their daughter, Erika, age 36. Because both Vernon, the original spouse beneficiary, and LaVonne, the original account owner, died before LaVonne’s RBD, Vernon is treated as the account owner and Erika, a nonspouse designated beneficiary, will be able to use the 10-year rule. Erika will have until December 31, 2034, to distribute her inherited IRA but will not be required to take annual life expectancy payments in years 1-9 because LaVonne (and Vernon) died before LaVonne’s RBD.
Example: Charles, age 68, died on Oct. 10, 2022, leaving his Roth IRA to his son, Carter, age 41. Carter had elected to use the 10-year rule then died on Sept. 23, 2024, leaving his inherited Roth IRA to his sister, Audrey, age 35. Because Carter, the original beneficiary, was a designated beneficiary, Audrey, the successor beneficiary, must distribute the inherited Roth IRA by December 31 of the year containing the 10th anniversary of Charles’ death (2032). Audrey will not be required to take single life expectancy payments because Charles, as a Roth IRA owner, is deemed to have died before his RBD, and Carter had not been required to take annual payments.
Common Questions
Following are some of the more common questions relating to a successor beneficiary’s distribution options.
Do you use the successor beneficiary’s age when calculating life expectancy payments?
No, life expectancy payments are calculated using either the original beneficiary’s or the IRA owner’s age. Payments are not recalculated for the successor beneficiary. The successor beneficiary must continue taking the same payments that the original beneficiary was supposed to take.
Does the new inherited IRA need to be distributed 10 years after the IRA owner’s death or the original beneficiary’s death?
If the original beneficiary was a designated beneficiary, the account must be distributed by December 31 of the year containing the 10th anniversary of the IRA owner’s death.
If the original beneficiary was an eligible designated beneficiary (including any individual who inherited an IRA before 2020), the account must be distributed by December 31 of the year containing the 10th anniversary of the original beneficiary’s death, unless the original beneficiary was a spouse or minor child.
Can a successor beneficiary who is the original beneficiary’s spouse treat the account as his own?
No. The original beneficiary’s spouse cannot treat the inherited IRA as his own.
What if a nonperson, such as a charity, estate, or trust, is the successor beneficiary?
A nonperson successor beneficiary will continue taking distributions based on the same schedule that the original beneficiary was on. The nonperson beneficiary must also distribute the entire account by the end of the 10th year following the IRA owner’s death.
