In the case of an inherited IRA, splitting it often is desirable in order to better accommodate a distribution plan after the primary owner dies. This can be done prior to the death of the IRA owner, or it could be done after the death of the IRA owner, as long as it’s accomplished before the end of the year following the year of death.
Why is this important?
When an IRA is inherited by a non-spouse individual, that individual is required to begin taking distribution of that IRA. The required distribution is based either upon the heir’s age or the age of the decedent. In most cases when the beneficiary is younger than the decedent, it is more advantageous to stretch those payments out over the longer period of time by using the heir’s age for the required distribution.
If there is more than one beneficiary, unless the IRA is split, the Required Minimum Distributions (RMDs) will be based upon the attained age of the “designated beneficiary”. This is the oldest living beneficiary as of September 30 of the year following the year of death of the primary IRA’s owner.
You can split the IRA into separate IRAs for each beneficiary, each titled as “John Jones, deceased, FBO Jane Brown” (probably not exactly like that because the names will be different in almost all cases). Then the individual IRAs can be distributed according to the age of each individual beneficiary. Splitting the IRA must be completed by December 31 of the year following the year of death.
Note: you don’t have to split the IRA into separate IRAs by September 30 of the year following the year of death. This is just the administrative date for determination of the designated beneficiary. If you split the IRA into separate inherited IRAs by December 31 of the year following the year of death, then administratively the designated beneficiary of each separate IRA as of September 30 would be the individual heir owner of the account.
Splitting the IRA into separate IRAs for each intended heir before the original owner dies simplifies matters for the heirs. By splitting the IRA before death, the inheritants can simply take RMDs based on their own attained age, and nothing else is required (no account splitting, no deadlines to meet). But if this isn’t (or can’t be) done, splitting the IRA after death is usually best for all involved.