IRS Letter: Naming Estate as Beneficiary Botched Stretch IRA Option for Heirs

Oct 29, 2020 / By Denise Appleby, APA, CISP, CRC, CRPS, CRSP
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Naming an estate as beneficiary of a retirement account—instead of persons—can eliminate the chance for heirs to stretch distributions over the maximum period possible, shortening the window of tax-deferred growth on their inheritance.

Designated beneficiaries who inherited IRAs in 2019 may still benefit from the pre-SECURE Act stretch IRA strategies. So do eligible designated beneficiaries who inherit retirement accounts in 2020 and after.

But that opportunity could be lost if the IRA is inherited through an estate. Such is the case in IRS private letter ruling (PLR) 202031007, where the surviving children of the IRA owner must use the less tax-efficient non-designated beneficiary distribution option because the estate—and not them, the children—is the named beneficiary of the IRA.


One of the most attractive benefits of an inherited IRA is the ability to defer taking distributions, allowing the inherited amount to continue growing on a tax-deferred basis. However, the period over which tax-deferred growth may continue depends on the type of beneficiary. For this article, the focus is on children inheriting IRAs from their parents.

The distribution period depends on whether the IRA is inherited:

  • outright (the children are the beneficiary of record (named) at the time of the owner’s death—making them designated beneficiaries), or
  • through an estate (the estate is the beneficiary of record), which means that the beneficiary is a non-designated beneficiary

When the child inherits the IRA outright

For an individual who inherits an IRA from a parent in 2019 or earlier, distributions may be taken over the beneficiary’s single life expectancy. Taking distributions over the beneficiary’s life expectancy is often considered the most tax-advantaged option, because it provides the longest period over which beneficiary required minimum distributions (RMDs) can be stretched, thus allowing for a longer period of continued tax-deferral of pretax amounts and tax-deferred growth.

Multiple beneficiaries: If multiple children share beneficiary status for one IRA, each would be able to use his/her life expectancy to calculate RMDs, providing separate accounting occurs by December 31 of the year that follows the year of death.

When the child inherits the IRA through an estate

If the beneficiary is a nonperson such as an estate, distributions must be taken:

  • Under the five-year rule, if the IRA owner died before the required beginning date (RBD), or
  • Over the remaining life expectancy of the decedent, if the owner died on/after the RBD.

Under the five-year rule, distributions are optional until December 31 of the fifth year that follows the year in which the IRA owner died, at which time the entire balance must be distributed from the inherited IRA.

These rules would also apply to an individual who inherits an IRA through an estate.

The separate accounting provision is not available to beneficiaries of an estate.

Reminder: RMDs are waived for 2020. For purposes of the five-year rule, the year 2020 is not counted.

Operational and tax reporting rules

When an IRA owner dies, the remaining IRA balance is required to be maintained in a beneficiary IRA, registered in the names of the decedent and beneficiary, and bearing the tax identification number (TIN) of the beneficiary. As a result, distributions from the beneficiary IRA would be reported under the TIN of the beneficiary, on IRS Form 1099-R, and generally would be included in the income of the beneficiary.

The facts of PLR 202031007

Under PLR, 202031007, the IRA owner died after her RBD, leaving her estate as the sole beneficiary of her IRA.

Reminder: This means therefore, that beneficiary RMDs must be taken over the remaining life expectancy of the decedent.

Under the terms of her will, the IRA—and certain other assets, were divided equally among her three children.

The personal representative of the decedent’s estate desired to transfer the inherited IRA to three beneficiary IRAs for the decedent’s children. This would mean that any 1099-R issued would be under the TIN of the child who received the distribution.

What was requested and why

Transferring a beneficiary IRA from an estate to an individual is not a provision that is addressed under the tax code. Instead, assets that leave a beneficiary IRA that is owned by an estate must either be transferred to another beneficiary IRA owned by that estate or distributed to the estate.

As a result, many IRA custodians will not transfer assets from a beneficiary IRA owned by an estate to a beneficiary IRA owned by a beneficiary of the estate, unless the IRS issued a PLR for that particular case, approving such a transfer. To ensure that the transfer was allowed and would not result in a distribution to estate, the following was requested of the IRS:

  1. Each child’s share would be held in a separate beneficiary IRA, to allow each child to determine his/her RMD amount, based on his/her share of the inherited IRA. Each of these IRAs would be under the respective child’s TIN.
  2. The amounts would be moved to the beneficiary IRAs owned by the children of the decedent, as non-reportable transfers.
  3. The distributions from the beneficiary IRAs—which would then be held by the children, would be made over the remaining life expectancy of the decedent.
  4. Distributions from the beneficiary IRAs would be reported under each beneficiary’s TIN.

The IRS approved all requests.

Reminder: A PLR cannot be used or cited as precedence and may be relied on only by the individual to whom it is issued.

The potential cost to the children

While getting the IRS’s approval is a plus, inheriting the IRA through the estate came at a cost to the children, as they are not eligible to take distributions over their life expectancies. This is because, even though they are being treated as beneficiaries of the IRA for tax reporting and income inclusion purposes, they are not ‘designated beneficiaries,’ as they were not the named beneficiaries at the time of the IRA owner’s death. And an estate is a non-designated beneficiary.

Let’s consider a scenario where:

  • The IRA owner died in 2019 at the age of 71, after her RBD.
  • The market value of the inherited IRA is $900,000, to be shared equally among three children, whose ages in 2019 were:
    1. Karla, age 30
    2. Tony, age 40
    3. June, age 50
  • No more than the RMD for each year is taken, and
  • The account grows at a rate of 5%.

Given this scenario, we will run calculations for the following options:

  1. The children inheriting the IRA through the decedent’s estate
  2. The children inheriting the IRA outright and splitting it into separate IRAs by December 31, 2020
Comparing 2 Options for Inheriting an IRA
A. Inheriting through the estate B. Inheriting outright
  • In this case, distributions would be made over a period of 15.3 years, which is the remaining life expectancy of the decedent. Nonrecalcuated (1 subtracted for each subsequent year.)
  • The total distribution would be $1,334,406.85 (split among the three children).
  • In this case, each child would be able to take distributions over his/her life expectancy.
    • Karla: L/E of 52.4
    • Tony: L/E of 42.7
    • June: L/E of 33.3
  • With each child allocated $300,000
  • Total distributions:
    • Karla: $1,382,762.42
    • Tony: $1,004,783.18
    • June: $748,279.20
    • Total: $3,135,824.80
Reminder: There is no RMD for 2020, as a result of the RMD waiver under the CARES Act.

The difference in accumulated amounts is about $1.8 million. This is quite significant, and there is even more impact if the account is a Roth, as the RMDs from a Roth account would be tax-free. For a traditional IRA with pretax balance, annual distributions could impact the amount of taxes owed—as generally, tax rates increase with higher taxable income. To illustrate, using the two options from above:

  • Where the estate is the beneficiary, the total distributions for 2021 is $66,083.92.
  • Compare that with the total distribution when the children inherit the IRA outright:
    • Karla: $6,128.40
    • Tony: $7,553.96
    • June: $9,752.32
  • Total: $23,434.68—less than half of the $66,083.92

A lesson for eligible designated beneficiaries of 2020 and after

The obvious (preventative) solution to the tax-disadvantaged shorter distribution period in the case of PLR 202031007 was to name the children as beneficiaries. But that cannot be fixed after the owner’s death.

While it is too late for those beneficiaries, it serves as a lesson to IRA owners who are still alive and want individuals to inherit their IRAs. Of course, the rules have changed for IRAs inherited in 2020 and after, and as a result, the impact would not be as significant for designated beneficiaries, since they are now subject to the new 10-year rule. But, for those who qualify as eligible designated beneficiaries, steps must be taken to protect their options to take distributions over their life expectancies, when it is financially prudent to do so.

A practical step is to remind IRA owners about performing beneficiary check-ups for their retirement accounts, and include an explanation of how their beneficiary designations could affect the options available to their beneficiaries.

Denise Appleby is CEO of Appleby Retirement Consulting, Inc., a firm that provides a wide range of retirement products and services to financial, tax, and legal professionals. The firm’s primary goal is to help prevent mistakes from being made with retirement account transactions; and, where possible, provide solutions for mistakes that have already been made. Their products include IRA guides and other IRA educational tools for financial and tax professionals.

Denise is also creator and CEO of the consumer education website

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