Separate accounts under the NEW minimum required distribution regulati

[Guest Martin Silfen]

Under the NEW proposed minimum distribution regulations, is it possible to have multiple beneficiaries of a single IRA establish separate accounts after the Owner's death if the Owner dies after his required beginning date? For example Owner names Child and Grandchild as 50% beneficiaries of his IRA and dies after his required beginning date. May Child and Grandchild establish separate accounts, so Grandchild can use his longer life expectancy, even though Owner did not do so by his RBD? Proposed Reg. 1.401(a)(9)-8, Q&A 2(B) seems to be limited to either (i) lifetime distributions (whether before or after RBD), or (ii) after-death distributions where the Owner dies before his RBD. It would certainly be convenient if Owner did not have to worry about separating his IRA into two pieces by his RBD. But it looks to me like this is still a concern. Does anybody have a different reading of the new regulations?

[KJohnson]

It looks like the final regs fixed this glitch. Do people agree?

[BPickerCPA]

Agree. The final regs fixed this.

[Guest reg_h2b]

Agree.

Though it's interesting that in 401(a)(9)-4 Q&A-5© the IRS seems to be totally excluding "separate accounting" when a trust is on the bene form. In a small way, they are making the Final Regs more restrictive than the IRS's *interpretation* of the old prop. regs. when a trust is a bene.

This issue was never explicit in the old regs. but in recent discussions with at least one IRS rep. who supposedly is "MR. 401(a)(9)", they would allow separate accounting (under the old regs.) w/ a trust so long as the trustee had NO discretion with respect to the allocation of the plan assets.

Try to contain your sadness.

[BPickerCPA]

I always thought that separate accounting was out when a trust was named as the beneficiary, simply because there was only ONE beneficiary, that being the trust.

People tend to forget that we're going from a general rule (trust means no designated bene) to a specific exception (a bene of a trust can qualify as an IRA bene if certain rules are met).

The tendency them becomes to treat the scenario with a trust as any other bene situation. It's not. Truth is, the IRS has already granted one break.

That all being said, I still think you have a shot as separate shares if the TRUST AGREEMENT itself causes the trust to split in to separate TRUSTS after death. But the IRS will not give you separate shares of one trust.

[Guest reg_h2b]

Barry-

I should have stipulated I was talking only about "qualified trusts" such that the individual bene's of the trust are considered to determine the LE of the MRD (old pregs. Q&A D-,5,6,7). Otherwise, there would be no design bene and thus separate accounting would be meaningless.

As to whether your "separate trusts" or my "no trustee discretion" is the standard the closest ruling I could find on this issue was PLR199903050 which stated:

"With respect to the first ruling request, only Trust M was named as beneficiary of all Plan X assets in the beneficiary form, executed by you and Individual A, that was in effect on Individual A's death. Trusts A, B, and C were created under the terms of Trust M. In order to satisfy the separate account rule under the regulations, plan benefits must be divided into separate accounts in the governing beneficiary instruments. Because the separation of plan benefits among Trusts A, B, and C occurred under the terms of Trust M rather than under the beneficiary designation form, the determination of Individual A's designated beneficiary can not be done on a separate account basis. Therefore, there were no separate accounts as of Individual A's death. Thus, all beneficiaries of the trusts created under Trust M must be considered in determining the applicable distribution period, because the general rule under Q&A H-2(a) applies."

By this logic Barry, neither of our standards would qualify. Two trusts WOULD only qual. under the above standard if each was separately on the bene form.

However, when we recently talked to the Employee Plans Technical Group it was flat out told to us that the standard-- under the old pregs-- was whether the trustee had discretion as to the allocation of plan assets. (Speculation: this strikes me as a more reasonable standard as it makes a distinction if the trustee is "picking and choosing" bene's after DOD or if the trust is merely acting as an "administrative conduit" because the trustee has no discretion).

Questions:

1. Do you know of any other relevant PLRs?

2. Do you agree that the new final regs have totally abolished separate accounting when only one trust is on the bene form-- even if there are subtrusts within that trust and/or the trustee has no discretion as to plan assest allocation?

3. I have had a long standing ruling request on this issue (submitted in 2000). We got a preliminary, nonofficial positive "feedback" on separate accounting (subject to final review based on the "no trustee discretion" standard). My fear now is that the reviewer may want to change the decision because it seems to conflict with the final regs. In other words, even though the old pregs. were governing in our case the IRS interpretation of those pregs. could change to reflect the final regs. because the original preg. interpretation was never in writing. Is my paranoia well placed?

Interested in your thoughts.

Reg

[BPickerCPA]

Reg.

1. no

2. yes

3. probably

[Bruce Steiner]

If this turns out unfavorably, it would really glorify form over substance, and make it harder to cope with the less flexible financial institutions.

If there is no spouse (e.g., at the surviving spouse's death), most clients leave their estates (including their IRA benefits) to trusts for their issue.

There are two ways to draft the beneficiary designation.

One way is to designate IRA owner's issue per stirpes (if there is no spouse or the spouse does not survive), except that each person's share goes to his/her trust under IRA owner's Will (rather than to him/her outright). That works fine even under the more restrictive interpretation of the regulation. But some of the less flexible IRA custodians will have trouble with it.

The other way is to name the credit shelter trust under the IRA owner's Will as the IRA beneficiary if the spouse does not survive. The Will can then provide (a) for the typical credit shelter trust if the spouse survives, or (B) if there is no spouse or the spouse does not survive, then the trust goes to the issue per stirpes, with each person's share held in further trust. The drafting would look be much like a revocable trust. The drafting isn't that much harder, and sometimes is necessary in order to deal with some of the less flexible IRA custodians. There is no logical reason for the result to be different, assuming that the trustees have no discretion.

[mbozek]

Bruce: Most IRA owners leave their IRAs outright to adult heirs as an income item to consume and prefer to place stock and other appreciated assets into a credit shelter trust to take advantage of the stepped up basis rules. Another option is to donate IRA to charity. Credit shelter Trust for IRA is extremely cumbersome because of the need for an independent trustee and costs for maintiaing the trust, tax reports, fees,etc. Only time trust is recommeded if minor children are beneficaries (and even there minimum IRA distributions can be distributed to UGMA/2503(B) trust established for minor) or if IRA owner does not have ehough capital assets to place in c/s trust.

[Bruce Steiner]

Let me try to explain this more clearly.

The issue of separate shares does not arise if there is a spouse and the IRA goes either to the spouse or to a credit shelter trust of which the spouse is a beneficiary.

The issue arises where there is no spouse.

I'll use a simple example to illustrate this point. Suppose the IRA owner is the surviving spouse, she has two children, A and B, and she wants to leave both her IRA benefits and her other assets to or in trust for A and B (with the share of a deceased child going in trust for the deceased child's issue).

Now for the drafting.

If she names as her IRA beneficiary (if her spouse does not survive her) something like "my issue per stirpes, except that each person's share [the share for each grandchild or more remote issue] is to be payable to his/her trust under my Will," that avoids this "separate share" issue. But this can be a problem with some IRA custodians.

To deal with these problem IRA custodians, one solution is to name as her IRA beneficiary (if her spouse does not survive her) something like "the Trustees of the Family Trust under my Will." To coordinate this with her Will, her Will could say that if her spouse survives her, she leaves the credit shelter amount to the Family Trust, and if her spouse does not survive her, she leaves her residuary estate to the Family Trust. If her spouse survives her, the Family Trust would contain the usual credit shelter trust provisions. If the spouse does not survive, the Family Trust under her Will (which in that case would also receive her IRA benefits) would be divided into separate shares for her issue. The result is the same. A and B each receive 50% of her IRA, with the share for a deceased child going in trust for the deceased child's issue. The only reason for this approach is to satisfy problem IRA custodians.

As to whether IRA benefits are payable to children outright or in trust, it shouldn't really make any difference as far as the "separate shares" issue goes, assuming that it's otherwise possible to stretch out the benefits over the child's life expectancy when using a child's trust as beneficiary (a different issue which has itself been the subject of considerable discussion, and which does not appear to have been resolved by the final regulations). Some people provide for their children in trust rather than outright for various reasons, including protection against creditors, predators, estate taxes in the children's estates, and protection against spouses. These reasons apply equally well in the case of IRA benefits as other assets (except to the extent IRA benefits are protected from creditors even if they pass outright).

While not related to the issue at hand, a credit shelter trust is not generally difficult or expensive to administer. Also, while there are cases in which an independent trustee is desirable, there are also cases in which the family is able to handle the credit shelter trust without an independent trustee, although if the spouse ever wants discretionary distributions (other than as limited by an ascertainable standard), she will need a co-trustee. Whether one or more of the children are appropriate co-trustees of the credit shelter trust will vary from case to case.

[Guest reg_h2b]

"As to whether IRA benefits are payable to children outright or in trust, it shouldn't really make any difference as far as the "separate shares" issue goes"

But-- er um, Bruce, 401(a)(9)-4 Q&A-5© in the final regs now says there is a difference. Do you disagree? Or by saying "shouldn't" are you saying that the IRS just wrote, well-- a dumb reg?

Reg "WishBrucewasdecidingmyrulingrequest" Jones

[Guest Shelton]

Bruce,

A question from an IRA custodian. We have no problem paying our distributions according to ‘special’ beneficiary designations. However, what we sometime find challenging is how some things are worded.

For example, an individual designated as his beneficiary "the Trustees of the Family Trust under my Will." , as a custodian, who is not familiar with trust laws and language, I would think this means that it is the trustee who are the beneficiary and not the trust. Something similar to “ the lady who took care of my mother”. Wouldn't “the Family Trust under my Will” be a much clearer designation?

[Bruce Steiner]

Reg: Since there is no substantive difference between the two methods of drafting, it makes no sense to treat them differently for tax purposes. It becomes a problem because some IRA custodians can't deal with beneficiary designations that don't fit on one line.

Shelton: a trust is not like a corporation in this regard. You can't give property to a trust, only to the trustees (in their fiduciary capacity).

[Guest reg_h2b]

Bruce:

I hear yah.

No economic difference between the two methods when trustee has no discretion on the IRA allocation.

But the IRS HAS made a distinction between the two methods (Final Reg.401(a)(9)-4 Q&A-5©). So it doesn't matter what WE think.

Or is your point that someone could bring a good Tax Court case to challenge this Final Regulation?

Reg "HopingifwelosethatBrucewilltakemycaseProBono" Jones

[Bruce Steiner]

Reg: I think there's a big difference between being frustrated that this isn't clearly permissible and bringing a Tax Court case.

If it makes enough difference, just draft it so the separate shares are established in the beneficiary designation (e.g., my issue per stirpes, except that each person's share is payable to his/her trust under my Will instead of to him/her). If the IRA custodian won't accept it, and it's important enough, then you can move the account to another financial institution.

[Guest reg_h2b]

Bruce-

Oh, I totally agree on present cases.

But my obsession with this issue is due to a past case where the IRA owner died in 1999 with a "qualified" trust on the bene form (his children were benes of the trust). We submitted a ruling request trying to get separate accounting under the old Pregs.

As I mentioned above, the IRS told us (in their initial review of our ruling request) that the standard under the old Pregs. was "no trustee discretion" in order to be allowed to do separate accounting under the old Pregs.

My concern is that this "interpretation" of the old Pregs could change (before they give us a final ruling) because it conflicts with the final regs which disallow this treatment.

Reg

[Guest turbodiesel39]

Splitting the Decedants IRA into seperate IRAs where there are multiple primary beneficiaries is a pretty good idea. In this case, the child and grand child, This IRA may be proportionally split into two accounts ONLY IF DONE BY THE DEAD LINE, December 31 of the year after the IRA owners death). This allows the beneficiaries to create seperate accounts so that each can use his or her own life expectancy to determine the required distributions;Otherwise, the distribution from the decedants IRA to the beneficiaries, if the IRA isn't separated, the required distributions wil distributed based on the life expectancy of the eldest beneficiary, leading to larger RMDs and therefore more rapid depletion of the account