By Jeremy Rodriguez, JD
I have an elderly client in his 80’s, not in the best of health. He has named his spouse (also in her 80’s) along with his 4 children as primary beneficiaries of his IRA. That said, I know the 4 children will have to establish inherited IRA’s – and keep them in such an account forever, receiving RMD’s at the single life table rate. However, is there some special handling that needs to be done by his spouse (who also has her own IRA and of course is receiving her own RMD’s) – since she is not the sole primary beneficiary listed – or should it just be a straight forward spousal rollover of her portion into her own IRA???
You have a good understanding of the rules and issues. The key to taking advantage of all the rules is to split the account. Technically, it doesn’t have to be done until December 31st of the year following death, but you could have the client do so now. By splitting the account now, we avoid the post-death deadline, each beneficiary gets to use their own life expectancy for post-death RMDs, and the spouse can execute the spousal rollover (if advisable). If the post-death deadline to split the account is missed, all beneficiaries will be stuck using the life expectancy of the oldest amongst them, which I imagine is the surviving spouse. I also suspect there’s a significant age disparity between the spouse and the children, making splitting the account now or before the post-death deadline very important.
I have a client (Joe) that is a partner in a law firm. Joe owns less than 5% of the law firm and he will turn 70.5 years old in March of 2019. For 2019, Joe will work about 20 hours a week and will receive a schedule K-1 from the law firm that reflects his earnings. Joe is a participant in the law firm’s qualified plans [profit sharing, 401(k) and pension]. Can Joe defer his RMDs from the firm’s qualified plans because he has not yet retired?
You need to be extra careful that the individual owns 5% or less of the company, because there are also attribution rules that must be considered. This is a snapshot determination, meaning we look at the exception once, when the individual reaches age 70 ½, and apply the correct treatment going forward. It doesn’t matter if the individual later reduces their ownership below the threshold.
That said, assuming the 5% test is met, it sounds like your client would qualify for the exception. The IRS hasn’t given us any guidance as to what constitutes “still working.” In other words, there is no bright-line rule on how much work a person should perform to qualify for the exception. However, the rule of thumb is that there must be an expectation that work will be performed, and the more consistent the work, the better. 20 hours per week is a fairly substantial amount, so your client should qualify.