Deceased named living trust as designated beneficiary of IRA...how to

[Guest le190]

ok. Thanks for clearing that up for me. So to add to my original question, can the distribution be made to a conduit IRA, and then be moved into the living trust as a sub-account, so as not to commingle the assets??? I guess what I'm getting at is can the IRA continue on, status quo, as an 'asset' of the living trust?

[Guest le190]

A deceased client, age 74, named a living trust as designated bene of his IRA, worth $107k. His 40 year old daughters are named equal bene's of the living trust. He was receiving RMDs at single life, recalc'd each year. What options do the daughters have at this point? What is an 'inherited conduit IRA'?

[Guest LMH]

Doesn't sound like the daughters have any choices. If he was using single life recalc to calculate his RMDs, the entire IRA needs to be distributed the year following his death to the trust.

As for the "inherited conduit IRA", it sounds like just that. An IRA that is soley made up of QP moneys that someone has inherited. With the possible exception of a spousal beneficiary, the conduit status shouldn't effect the inherited part.

[Guest LMH]

The IRA can only continue on until 12/31 the year following death. At that time the IRA must be distributed and taxable to the trust.

I can't really see a need for any sort of conduit IRA in this case. Anyone else have any ideas?

[Guest le190]

John- that's what I thought. Since the trust does in fact qualify, I thought the IRA could continue on until distributable to the daughters once they reach age 50. thus, maintaining the tax free status until then. thanks for the info!

[John Olsen]

I might be missing something, but if dad died after his RBD and was recalculating his life expectancy, that life expectancy drops to zero in the year following his death, but if the Trust qualified as a Designated Beneficiary Trust, then dad was entitled to use the JOINT life expectancy of himself plus the beneficiary with the shortest life expectancy, modified by the MDIB rule (making the daughter 10 years younger than dad for RMD purposes).

It appears to me (again, I might be missing something) that the remaining distribution period is now the oldest daughter's life expectancy, per table V (NOT modified by MDIB) in the year of Dad's first required distribution, less the number of years elapsed since.

The entire IRA would, indeed, be required to be distributed by 12/31 of the year following Dad's death IF THE TRUST DID NOT QUALIFY AS A DESIGNATED BENEFICIARY TRUST (e.g.: all beneficiaries were not identifiable, not individuals, etc.)

If I'm wrong (which is ALWAYS possible), I shall appreciate correction.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[Guest LMH]

I agree with John. I just assumed the trust was not qualified. But you know what they say about assuming. Sorry for any confusion.

[Kathy]

LE 190 - What do you mean by:

"the IRA could continue on until distributable to the daughters once they reach age 50. thus, maintaining the tax free status until then."??

The IRA must continue to make distributions "at least as rapidly" to the beneficiary (trust). My take is that, if the oldest beneficiary is 40 the year the IRA holder is 74, she must have been around 36 when his RMDs started, meaning that the distributions must be made to the trust by going back to her Life Expectancy factor in his 70 1/2 year (somewhere around 46??) and then subtracting 1 for each year that has passed to determine the life expectancy factor to be used for the distributions. The trust must take its first distribution (about 1/40th?) by December 31 of the year after the year of the IRA holder’s death. That life expectancy factor is reduced by one for each subsequent year.

[Fredman]

Whoa, I'm missing something here...the original post says, "He was receiving RMDs at single life, recalc'd each year."

Even if the IRA owner was entitled to a joint calculation when he turned 70 1/2, he (I'm assuming) elected single calculation.

What allows the calculation to be changed to joint now that he has passed?

[This message has been edited by Fredman (edited 03-23-99).]

[Guest le190]

Kathy- you're right. What I meant to say was that the RMDs continue out of the IRA, and is not distributable, in whole, to the trust this year.

[John Olsen]

The oldest daughter's ACTUAL life expectancy was not a factor in the original RMD. The MINIMUM DISTRIBUTION INCIDENTAL BENEFIT (MDIB) rules required that her age be no more than 10 years younger than the participant.

As for the point that there can be no CHANGE in payout, there is no change. The RMD participant was entitled to was his life expectancy AND THAT OF HIS BENEFICIARY -

a. if a Designated Beneficiary existed on the RBD, and

b. in accordance with MDIB rules, if applicable.

I know of no Regulation or Code Section which says that participant LOSES the right to take the ALLOWABLE RMD by taking accelerated distributions (as, for example, taking them over 1 life expectancy).

A colleague of mine, to whom I mentioned this problem, brought up a GREAT point. At the participant's RBD, this Trust was APPARENTLY a Revocable one. At THAT TIME, the rules required that a Trust, to be a designated beneficiary trust, had to be IRREVOCABLE. Those rules were changed in '97 to allow a Trust which IS IRREVOCABLE AT PARTICIPANT'S DEATH. Query whether the Trust, EVEN IF ITS PROVISISONS PROVIDED THAT IT WAS IRREVOCABLE AT DEATH, would have qualified under the "old" rules. (As we all know, a Revocable Living Trust becomes DE FACTO irrevocable at death, because the only party who can revoke it is now gone. But the Proposed Regs required LANGUAGE to that effect.

Personally, if I were the Trustee, I would be comfortable with making distributions in accordance with the remainder of Oldest Daughter's life expectancy at dad's death.

But is the Trustee willing to do that?

... interesting case, this!

John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[John Olsen]

LE190:

The Trust CANNOT "continue on" without making distributions until daughter's age 50.

It MUST make distributions, in accordance with the RMD rules.

[Guest blaster]

Fredman is correct. The issue is: Did the decedent elect to take the RMD over his single life w/ recalculation? If yes, party is over. His life expectancy at his death is ZERO. Therefore, the daughters may not extend the payout or the deferral. Sorry.

[BPickerCPA]

Blaster,

Without getting into the specifics of this particular fact pattern, since the discussion had ended almost 2 months ago, but the IRS has agreed that IF there is a designated beneficiary (DB) on the RBD, that DB can use their own life expectancy as of RBD, reduced for each year of distribution, EVEN THOUGH the participant took distributions based upon single life, recalced.

[Guest mcdonnell]

le190 - You may want to check with the IRA Trustee/Custodian to verify that the trust was specifically designated as the beneficiary on the RBD and not added after the RBD? If it was not designated but added later(which is quite common),then assuming there was no designated beneficiary on the RBD the entire account must be distributed by 12/31 following the year of death.

[Bruce Steiner]

In response to John Olsen's long message of March 23, I cannot understand why someone would go through the complexity of creating a revocable trust, naming it as the beneficiary of his IRA benefits, and then having the trust pay out to the daughters outright.

But even under the old proposed regulations, there are several PLRs that are more liberal than one might guess, so that the stretchout might have been OK even under the old proposed regulations. PLRs 9641031, 9537005, 9253052.

Of course, if he wanted the daughters to take outright, he could simply have named the daughters as beneficiaries; and if he wanted the daughters to take in trust, he could have left the benefits to trusts for their benefit.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL