Trust as Beneficiary

[jane123]

I have an issue where the IRA holder named a trust as the beneficiary of the IRA. Form my understanding of the final RMD regs, specifically treas 1.408-8 Q&A 5, this designation cannot be passed on to the underlying beneficiaries of the trust. This means that all post death distributions must be reported under the name and tax ID number of the trust beneficiary. The trustee may then pay the funds to the underlying beneficiaries of the trust.

However, I am being challenged. I am being told by the trustee of the trust that the effect that the underlying beneficiaries of the trust can be treated as the direct beneficiary of the IRA, and not just for purposes of calculating RMDs as provided in the regs, but that we should ignore the trust altogether and treat the underlying beneficiaries of the trust as if they were the direct designated beneficiaries ( i.e. , instead of naming the trust, the IRA Holder named the individuals as the beneficiaries)

What is the right approach or permissible allowances.

Thanks for your help.

[BPickerCPA]

The custodian of the IRA must pay the benefits to the named beneficiary, which is the trust. The distribution must then be reported using the trust's EIN.

It is possible that the trustee can assign the rights to receive the IRA benefits to the underlying beneficiary, if, under the terms of the trust, the underlying beneficiary succeeds to the IRA benefits. If that is the case, future benefits will be paid to the individual(s) using their own SSNs.

[Guest godmom]

Barry

In a trust beneficiary of a Roth IRA, when the trustee generates Schedule B of form 1041 , should line 12 be ignored in order to calculate line 15 which is needed for the K-1 distribution to the beneficiaries?. It does not make any sense if line 12 is used.

The tax exempt roth distribution is the only income into the trust which is distributed to the beneficiaries.

Confused godmom

[mbozek]

Barry: I thought under the assignment of interest rule, a beneficiary will be taxed if the right to a payment is assigned to another person. See reg. 1.408-4(a)(2)

[BPickerCPA]

You are correct that an individual cannot assign his interest to another individual. However, in the case of a trust, it is not one beneficiary deciding to give his interest to another bene, rather it is the trustee transferring the right to receive the benefit to the successor in interest. Perhaps, "assignment" is not the legally proper word to use.

In this case, the trustee can only do what the trust authorizes him to do. In some cases the trustee must act in a certain manner; in other cases the trustee has discretion, within the parameters of the trust instrument.

[mbozek]

Barry: Do You have a citation for that theory? I would think that the trustee would have to execute a disclaimer under IRC 2518 to avoid taxation. Its my understanding that the trust takes all items of IRD into income and then gets a deduction for amounts paid to a beneficiary to the extent the trust has DNI. See IRC 661(a)(2).

[Guest P A Weick]

I think the regulations under Section 691 of the Internal Revenue Code allow for the assignment of assets which generate income in respect of a decedent, which IRA proceeds do, from an estate or trust to their beneficiaries without triggering income taxation.