Advanced Underwriting Consultants

Ask the Experts – March 6

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My deceased former client named her living trust the beneficiary of an IRA.  There are two primary non-spouse successor beneficiaries of the living trust.  Can the trustee of the trust arrange for the IRA account to be split into two parts—one for each beneficiary—and can each beneficiary stretch her own part based on her life expectancy?

Answer: No.

The general rule is that if an inherited IRA with multiple beneficiaries is divided into separate accounts, each beneficiary can stretch RMDs based on his or her own life expectancy.

Additionally, the beneficiaries of a trust (which itself is the named beneficiary of the IRA) may be treated as the designated beneficiaries—and qualify for stretch treatment—if four requirements are met:

1. The trust is valid under state law,

2. The trust is irrevocable or becomes irrevocable upon the death of the grantor,

3. The beneficiaries of the trust are readily identifiable from the trust itself, and

4. A list of beneficiaries or a copy of the trust is provided to the IRA by October 31 of the year following the date of the grantor’s death.

These types of trusts are referred to as look-through trusts.  The oldest beneficiary of a look-through trust is considered to be the designated beneficiary for stretch purposes.

It would appear that the combination of these two rules (separating an IRA and the look-through trust rule) would allow each beneficiary to stretch based on his or her own life. However, the IRS held in Regulation Section 1.401(a)(9)-4, Q&A-5(c), that if the IRA beneficiary is a trust, the IRA cannot be separated and stretched based on the lives of each individual trust beneficiary.

With proper planning, this problem could be avoided. For example, if the beneficiaries are widely separated in age, it may make sense to plan on the front end to divide the IRA into multiple accounts, and direct each of the accounts into separate look-through trusts for each one of the beneficiaries. This way, the IRA owner maximizes the control and tax aspects of the IRA planning.

However, in today’s question, there is only one living trust with two beneficiaries, and so separating the IRA into multiple accounts would not allow each of the beneficiaries to stretch based on each of their respective lives.

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