Friday March 29, 2024

4.6.2 Distributions to Children and Other Heirs

Distributions to Children and Other Heirs

Distributions to Children and Other Heirs:  If the IRA owner designates a nonspouse as the beneficiary of the IRA, the beneficiary must receive distributions over a maximum ten-year term.

Income in Respect of a Decedent:  Ordinary income assets in the hands of a child or other heir are termed "income in respect of a decedent" (IRD) and governed by Sec. 691.

Distributions to Children and Other Heirs


If the IRA owner designates a nonspouse as the beneficiary of the IRA, the beneficiary must receive distributions over a maximum ten-year term.

Income in Respect of a Decedent


Ordinary income assets in the hands of a child or other heir are termed "income in respect of a decedent" (IRD) and governed by Sec. 691. While capital gain assets generally receive a step up in basis when transferred at death, there is no step up in basis for IRD. See Sec. 1014(c). Therefore, all payouts from a typical IRA will be taxed as ordinary income to the recipient.

If a pecuniary bequest, such as a fixed sum of money, is satisfied by IRD transferred to an estate, the income tax could be accelerated. Sec. 691(a)(2). However, mere division of an IRA or pension plan will ordinarily not trigger the recognition of IRD until the income is paid to a beneficiary.

If the IRD causes the estate to be subject to estate tax, there is an income tax deduction as the IRD is distributed. Sec. 691(c). The deduction is normally taken on the distributions of IRD and the usual method for determining the deduction is to allocate the amount of estate tax appropriate for the IRD and divide that number by the original value of the IRA. All distributions from the IRA then receive an allocation of the IRD Sec. 691(c) charitable deduction. This is deductible as a miscellaneous deduction not subject to the 2% floor.

Private Letter Rulings

PLR 200444033 Nieces May Divide IRA After Death of Aunt:   Irene IRA owned an individual retirement account (IRA) and named her trust as the beneficiary of the IRA. After having reached her IRA required beginning date, Irene died. Consequently, Irene's trust was the beneficiary of the IRA. Further, the two primary beneficiaries of the trust were Irene's two nieces.

PLR 201633025 Trust Deemed See-Through Trust:   Decedent died at age 59. Trust was the sole beneficiary of Decedent’s three IRAs, combined into IRA X. Trust is irrevocable and valid under State’s laws.


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