Trust as beneficiary and separate accounts

[smm]

I'm looking at the final 401(a)(9) regulations for the first time and am puzzled about a sentence that was not in the proposed regulations (or if it is, I missed it).

Q/A 5© of (a)(9)-4 states that "the separate account rules under A-2....are not available to beneficiaries of a trust with respect to the trust's interest in the employee's benefit."

Does this mean that if there are 3 individual beneficiaries of a trust, and assuming that the requirements re. the trust are met so that they are deemed to be the designated beneficiaries for (a)(9) purposes, separate accounts cannot be set up for their distributions post death of the employee? What is the rationale for this.

If there was no trust, then separate accounts could be established following the death of the employee (unless again, I am reading this incorrectly), and distributions from the separate accounts could be made to the 3 individuals based on their own life expectance?

Thanks for your thoughts.

[smm]

One clarification on my post. The trust I am referring to is divided into separate share and is not a sprinkling trust. Therefore, the 3 beneficiaries each have a 1/3 share of the trust.

[mbozek]

While I have not reviewed the final regs, the provison you cite is a formal statement of a rule which had appeared in numerious private letter rulings issued by the IRS that that ability to divide an IRA into separate shares where each share was based on the life expectancy of a single beneficary was permissble only if made in the IRA beneficiary designation form of the IRA, not under ther terms of a trust which was the benericary of a decedent's IRA. See plr 199903050

[smm]

Thank you for the reference to PLR 199903050. It does contain the quote that has been incorporated in the final regulations. However, although the quote made sence under the 1987 regulations, the rationale does not continue to apply anymore under the final regulations, which allow you to set up seperate accounts after the date of death. The regulations are quite clear and perhaps the solution is to use separate trusts if there is a great disparity in the life expectancy.

[mbozek]

I think that the IRS believes that the right to create separate shares is limited to the IRA document and not to a trust which is a single designated beneficiary.

[BPickerCPA]

Without reading peoples' minds, it appears that the issue is that there is one beneficiary, that of the trust. Normally, that would mean you have no designated beneficiary. Special rules permit you to look through the trust to treat the oldest trust beneficiary as the designated beneficiary. I think beyond that, the IRS doesn't want to have to deal with the trust. Does it make sense? To me it does. I think people tend to complicate things. If you want your IRA to go 1/3 to each child, why do you need a trust?

[mbozek]

Barry: IRA owners set up trusts because they want to protect the assets from creditors or to prevent the beneficaries from depleting the assets in a single sum payment. Under the custodial accounts, the beneficary of a decased owner acquires all of the rights of the owner including the right to accelerate distributions. The IRA owner could divide the IRA into separate shares and name a trustee for each beneficary as the beneficary of each share. the trustee of some large IRAs hire professional investment managers.

[smm]

The thread, of course, is growing more interesting, so allow me to clarify my original question. If there are 3 beneficiaries of an IRA, we are all in agreement that the IRA can be divided into separate shares so that each share can be distributed over the life expectancy of the respective beneficiary. My original question was whether the same result is possible if a trust is a beneficiary of the IRA, but the trust has 3 beneficiaries, and the terms of the trust state that the assets of the trust, including the IRA, are to be divided into 3 shares immediately on the death of the IRA owner. Assume that the regulations are complied with so that the trust vehicle can be "looked through" to identify the designated beneficiaries. Under the current regulations, separate accounts can be established after the death of the IRA owner (up to 9/30 of the following year). Therefore, logically, the result should be the same, whether or not a trust is involved. However, the sentence in the regulations that I quoted ablove, appears to preclude this. Therefore, perhaps the solution is to set up 3 separate trusts, unless someone believes that it could be done.

[smm]

Natalie Choate discusses this question in her outline of the final regulations. The link was listed on benefitslink yesterday afternoon.

[mbozek]

At an ALI-ABA teleconverence this afternnon the question was answered with a no-- Separate accounts can only be set up in a beneficiary designation not under a trust instrument.