Pub. 11 2021-2022 Issue 3-1

November • December 2021 13 First, let’s be clear: Claire should take her $5,000 RMD. The IRS’ position is that the decedent could have taken the RMD before death; after death, the individual beneficiaries are responsible for distributing their proportionate shares based on their beneficial interest. But in this case study, Claire has made the proper response impracticable. So it may be helpful to consider several possible responses and why they are not suitable options. • Pay the remaining RMD to the decedent. This may seem like an easy solution. After all, you may already have a savings or checking account associated with the deceased client. So it would be easy to transfer the RMD into such an account. But once the client dies, the beneficiaries have an unfettered right to the IRA assets. What’s more, the IRS has made clear, in a variety of contexts, that payments to clients after their death is not appropriate. So even if, for example, the beneficiaries would receive the assets through the decedent’s estate anyway, paying assets to a dead client is not recommended. • Pay the remaining RMD to the other beneficiaries. While there’s no official support for this option, this approach at least has a pretty solid foundation in common sense. After all, the rationale is that the entire RMD gets distributed, so the IRS obtains revenue on the entire taxable portion. But the IRS has not endorsed this method of satisfying the year-of-death RMD. The best thing that may happen from taking this action is that the nonresponsive party failing to take the RMD could argue there was a good faith attempt to satisfy the total RMD. And although it might be a good effort, ultimately, it should not be relied on to fulfill the IRS’ rule that all beneficiaries must satisfy their respective portions of the total RMD amount. • Pay the remaining RMD to the missing beneficiary. This approach also appeals to common sense. If the only proper way to satisfy the RMD is to pay each beneficiary, then why not do just that? The concern here is making a distribution without proper authorization. While it may be unlikely that the recipient will object to a financial organization trying to help a client avoid a substantial penalty, there are other practical concerns. For instance, unless the nonresponsive beneficiary already has an account with your organization, how can you properly establish an account? (Think “know your customer” and “customer identification programs.”) And simply cutting a check and sending it to the last known address may merely kick the can down the road when the check ends up uncashed. • Do nothing and wait for the beneficiary to surface. Sometimes the safest approach is to leave the responsibility with the person who is entitled to the RMD. Unless your IRA document gives you the authority to pay an RMD to a beneficiary without a specific distribution request, it may make good sense to take no action. Let’s assume that you’ve made reasonable efforts to locate unresponsive or missing beneficiaries. It seems that such beneficiaries would be hard-pressed to object to your not taking extraordinary measures to fix a problem that they may have created. And if they were unavailable and thus unaware of their need to take an RMD, they then may have a reasonable-cause explanation to the IRS – one that could help them avoid the 50% penalty. Why Mention Options When None Are Ideal? This case study may be frustrating to consider. But it may give you some ideas for resolving this or other similar situations. For example, what if Alice insisted on taking an extra $5,000 from her inherited IRA to satisfy Claire’s RMD? Of course, Alice can always take more than is required, up to the entire amount in her account. But if you can intelligently discuss the IRS’ RMD rules, you may be able to persuade Alice – perhaps along with her competent tax or legal counsel – to draft a written request that does two things: acknowledges her objectives while at the same time recognizing that your financial organization is not giving her any advice. Life is full of gray areas. Sometimes so is retirement plan administration. Sometimes taking no action is the best course of action. But knowing your clients may have to choose from a list of undesirable options may help you respond to their needs better and possibly turn a bleak situation into a more satisfactory resolution. Knowing your clients may have to choose from a list of undesirable options may help you respond to their needs better and possibly turn a bleak situation into a more satisfactory resolution.