By Andy Ives, CFP®, AIF®

IRA Analyst

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There are many gaps. Generation gap, stop-gap, The Gap Band. In baseball you can hit into the gap. Football linemen have an A-gap, B-gap and C-gap to concern themselves with. Of course, there is the Cumberland Gap. And there is a very important gap to consider when dealing with IRAs – the “Gap Period.”



The gap period begins on the date of death of an IRA owner and ends on September 30 of the following year. A significant amount of planning activity can, and should, take place within this window, including:



Post-Death Distributions (i.e. “Cash-outs”): If a charity is named as an IRA beneficiary, there is a good chance they will want the money as soon as possible. The same can be said for an individual who does not care to stretch the IRA and would prefer a lump sum payout. These cash-outs should be completed during the gap period.



Account Splitting: If more than one person is named as beneficiary, and if each of these individuals would like to stretch the IRA by using their own life expectancy to calculate the RMD from their inherited portion, the account will need to be split. (Technically, the tax code provides until December 31 of the year after the owner’s death to split the IRA, but many custodians will not allow you to wait so long.) Splitting the account by September 30 gives the beneficiaries another three months to take their respective death RMD. If the account is not split into separate inherited IRAs before the deadline, the beneficiaries will be forced to use the life expectancy of the oldest beneficiary when calculating their RMDs. This may not be an issue if the beneficiary ages are similar but could cause a problem if there is a great disparity.



Disclaimers: Disclaimers must be in writing and generally need be received within 9 months after the IRA owner’s death. Be aware that this 9-month period is measured as of the date of death, meaning it could expire well before the September 30th deadline. A disclaimer can be for all or a portion of the interest in the IRA. By leveraging a disclaimer (if all the desired beneficiary candidates are named on the beneficiary form prior to death), a surviving spouse can actually change the beneficiary of their deceased spouse’s IRA. How? Let’s bring together Cash-outs, Account Splitting and Disclaimers into an all-inclusive example:



Howard passed away in December 2017 and named his wife Ella and their local church as the primary beneficiaries of his IRA. Howard and Ella’s four children were also named as equal contingent beneficiaries. The gap period ran from the date of Howard’s death until September 30, 2018.



In March 2018, well within the gap period, the church requested a cash-out, and the custodian completed the transaction. After the cash-out, the church was no longer factored into any considerations when calculating payouts for the remaining beneficiaries. Ella now stood as the sole primary beneficiary.



Ella did not need the money and wanted to direct it to her four children. Since Howard’s death was less than 9 months earlier, Ella made a qualified disclaimer of her entire portion of the IRA in June 2018. Her disclaimer resulted in the children being left as the only remaining beneficiaries. At the end of the gap period on September 30, 2018, the four children were officially recognized as the designated beneficiaries of Howard’s IRA.



As it turned out, the age differential between the eldest and youngest sibling was 15 years. Since the IRA was properly split, each child was able to maximize the stretch by using their own life expectancy when calculating their required minimum distribution.



Fortunately, this family and their advisor understood the rules and made prudent decisions. Unwinding a hasty transaction post death can be difficult and sometimes impossible. Remember, you have time. Be sure to leverage the planning options available during the IRA gap period.

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