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Estate IRA beneficiary with trust


B21

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I have a situation where a client recently deceased & has her estate as beneficiary of her IRA.

Her will created a trust for estate assets. Since the trust is the beneficiary of the estate which will receive the IRA funds, can the beneficiaries of the trust be considered as designated beneficiaries for IRA RMD purposes?

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The answer is a definite MAYBE.  The following is from Natalie Choat's authoritative book (the bible on this stuff) which every firm needs to own (this is from the on-line version which I pay good money for and it is worth every penny, and it's NOT that expensive.  The estate or trust attorney needs to be involved in making this determination.

Trust beneficiaries complicate the whole RMD determination. IRS regulations allow a trust named as beneficiary of the plan or IRA to qualify for this favorable form of payout (stretch out) if certain requirements are met. These requirements  are usually referred to as the “IRS’s minimum distribution trust rules” or the “see-through trust rules”. The person primarily responsible for verifying that the trust qualifies as a see-through trust is the trustee of the trust named as beneficiary. The trustee is the one who must comply with the minimum distribution rules by correctly calculating (and taking) the annual required distribution. If the trustee fails to take a required distribution the trust will have to pay the resulting 50% excise tax. § 4974(a). It is highly recommended that the trustee of a trust named as beneficiary of a retirement plan obtain a legal opinion regarding the trust’s qualification as a see-through trust (or not). This will show (in case of any challenge by the IRS) good faith effort to comply with the tax rules, or (if the opinion is that the trust does not qualify as a see-through trust) shield against a possible beneficiary claim that the trustee should have used the life-expectancy payout method.

The Code allows retirement plan death benefits to be distributed in annual instalments over the life expectancy of the participant’s Designated Beneficiary. § 401(a)(9)(B)(iii).  Although the general rule is that a Designated Beneficiary must be an individual, the regulations allow you to name a trust as beneficiary and still have a Designated Beneficiary for purposes of the minimum distribution rules: If the trust passes several rules, it is considered a look-through or see-through trust, and the individual trust beneficiaries are treated as if they had been named directly as beneficiaries of the plan or IRA—for some, but not all, of the minimum distribution rules.

The five “RMD trust rules.” Reg. § 1.401(a)(9)-4, A-5(b), contains the IRS’s four “minimum distribution trust rules” (also called the RMD trust rules): 1. The trust must be valid under state law. 2. “The trust is irrevocable or will, by its terms, become irrevocable upon the death of the” participant. 3. “The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit” must be “identifiable...from the trust instrument.” 4. Certain documentation must be provided to “the plan administrator.” If the participant dies leaving his retirement benefits to a trust that satisfies the above four requirements, then, for most (not all!) purposes of § 401(a)(9), the beneficiaries of the trust (and not the trust itself) “will be treated as having been designated as beneficiaries of the employee under the plan….” Reg. § 1.401(a)(9)-4, A-5(a). However, treating the trust beneficiaries as if they had been named as beneficiaries directly does not get you very far if the trust beneficiaries themselves do not qualify as Designated Beneficiaries. Accordingly, Rule 5 is that:

5. All trust beneficiaries must be individuals. The IRS calls a trust that passes these rules a see-through trust, because the effect of passing the rules is that the IRS will look through, or see-through, the trust, and treat the trust beneficiaries as the participant’s Designated Beneficiaries, just as if they had been named directly as beneficiaries of the retirement plan, with two significant exceptions: First, “separate accounts” treatment is never available for purposes of determining the ADP for benefits paid to multiple beneficiaries through a single trust that is named as beneficiary;  Second, a trust cannot exercise the spousal rollover option, even if it is a see-through. Reg. § 1.408-8, A-5(a).

 

Hope the above helps you.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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In many Trust documents I've reviewed, assets are usually delineated in the Trust.  This is usually because personal items and certain accounts are kept outside of the Trust for distribution, as opposed to defining "all estate assets" as Trust assets.  However, I'll defer to the situation at hand.

I agree, that it's a definite maybe, and -- both -- the estate executor/attorney and the Trust attorney must agree on treatment.  Even if the attorney's agree, it is most important to check with the Custodian of the IRA to see if they have a set procedure  or precedence.

My only concern would be a "double pass through" from estate to Trust to pass-through beneficiaries.  The general rules discuss Trusts as beneficiaries, but not necessarily Trust as a pass-through of an estate. 

ERPA

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B21,

The issue is who is the deemed beneficiary and who is the designated beneficiary. For only the designated beneficiary can establish an Inherited IRA for life expectancy payments.

As CJ Allen mentioned the IRS has in the past allowed for some of those that have specifically applied for a private letter ruling  when a trust was the named beneficiary (deemed beneficiary) of an IRA to allow the trust beneficiaries of the trust to become the designated beneficiaries of the IRA.

The only private letter rulings I have seen that allow for the beneficiaries of the estate (deemed beneficiary) to be treated as if they were the designated beneficiary of the IRA is when the beneficiary of the estate is the spouse and the spouse has complete control of the estate.

I am not aware of any precedence that as CJ stated that allows for a non-person of an estate to be a designated beneficiary of the IRA.

Your client should rely on the advice of their counsel to determine if filing for a private letter ruling to confirm whether the  IRS would allow for this request of your client. 

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19 hours ago, Lou S. said:

I love Larry's answer of definite maybe.

Here is a flowchart I've found pretty helpful in the past. It usually comes down to how well the trust was drafted.

https://www.aicpa.org/content/dam/aicpa/interestareas/personalfinancialplanning/resources/retirementplanning/downloadabledocuments/benflowchart.pdf

 

I have that same chart rubber-banded to Natalie's hardcover edition of her text!  I don't have any idea how I got it, but it is a very well done piece.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 1 month later...
On 7/12/2018 at 5:26 PM, Larry Starr said:

The answer is a definite MAYBE.  The following is from Natalie Choat's authoritative book (the bible on this stuff) which every firm needs to own (this is from the on-line version which I pay good money for and it is worth every penny, and it's NOT that expensive.  The estate or trust attorney needs to be involved in making this determination.

Trust beneficiaries complicate the whole RMD determination. IRS regulations allow a trust named as beneficiary of the plan or IRA to qualify for this favorable form of payout (stretch out) if certain requirements are met. These requirements  are usually referred to as the “IRS’s minimum distribution trust rules” or the “see-through trust rules”. The person primarily responsible for verifying that the trust qualifies as a see-through trust is the trustee of the trust named as beneficiary. The trustee is the one who must comply with the minimum distribution rules by correctly calculating (and taking) the annual required distribution. If the trustee fails to take a required distribution the trust will have to pay the resulting 50% excise tax. § 4974(a). It is highly recommended that the trustee of a trust named as beneficiary of a retirement plan obtain a legal opinion regarding the trust’s qualification as a see-through trust (or not). This will show (in case of any challenge by the IRS) good faith effort to comply with the tax rules, or (if the opinion is that the trust does not qualify as a see-through trust) shield against a possible beneficiary claim that the trustee should have used the life-expectancy payout method.

The Code allows retirement plan death benefits to be distributed in annual instalments over the life expectancy of the participant’s Designated Beneficiary. § 401(a)(9)(B)(iii).  Although the general rule is that a Designated Beneficiary must be an individual, the regulations allow you to name a trust as beneficiary and still have a Designated Beneficiary for purposes of the minimum distribution rules: If the trust passes several rules, it is considered a look-through or see-through trust, and the individual trust beneficiaries are treated as if they had been named directly as beneficiaries of the plan or IRA—for some, but not all, of the minimum distribution rules.

The five “RMD trust rules.” Reg. § 1.401(a)(9)-4, A-5(b), contains the IRS’s four “minimum distribution trust rules” (also called the RMD trust rules): 1. The trust must be valid under state law. 2. “The trust is irrevocable or will, by its terms, become irrevocable upon the death of the” participant. 3. “The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit” must be “identifiable...from the trust instrument.” 4. Certain documentation must be provided to “the plan administrator.” If the participant dies leaving his retirement benefits to a trust that satisfies the above four requirements, then, for most (not all!) purposes of § 401(a)(9), the beneficiaries of the trust (and not the trust itself) “will be treated as having been designated as beneficiaries of the employee under the plan….” Reg. § 1.401(a)(9)-4, A-5(a). However, treating the trust beneficiaries as if they had been named as beneficiaries directly does not get you very far if the trust beneficiaries themselves do not qualify as Designated Beneficiaries. Accordingly, Rule 5 is that:

5. All trust beneficiaries must be individuals. The IRS calls a trust that passes these rules a see-through trust, because the effect of passing the rules is that the IRS will look through, or see-through, the trust, and treat the trust beneficiaries as the participant’s Designated Beneficiaries, just as if they had been named directly as beneficiaries of the retirement plan, with two significant exceptions: First, “separate accounts” treatment is never available for purposes of determining the ADP for benefits paid to multiple beneficiaries through a single trust that is named as beneficiary;  Second, a trust cannot exercise the spousal rollover option, even if it is a see-through. Reg. § 1.408-8, A-5(a).

 

Hope the above helps you.

Hi Larry, I like your answer- but only if the trust was a designated beneficiary of the IRA. In this case, the IRA has no designated beneficiary, because the estate was the beneficiary at the time of death.  Therefore, the distributions must be made under the 5-year rule if death occurred before the RBD, or over the decedent's remaining life expectancy if death occurred on/after the RBD. The beneficiaries of the trust are not eligible to be 'designated beneficiaries '.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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