Advanced Underwriting Consultants

Question of the Day – September 19

Ask the Experts!

Here’s the question of the day.

Question: My client died naming her testamentary trust the beneficiary of his IRA.  The trust names the client’s four children the trust beneficiaries.  Can the IRA be split into four accounts, with each stretched based on each beneficiary’s life expectancy?

Answer: Probably not.

Under the Section 401(a)(9) regulations, if sub-accounts are established for each beneficiary by December 31 of the year following the year of death, each child can take distributions from his or her respective sub-account without affecting the other children.  The required minimum distribution for each sub-account will be based on that sub-account owner’s age.

Experts had hoped that this same result could be accomplished with a trust as beneficiary; that is, the trust could be divided into sub-trusts for the benefit of each trust beneficiary and each sub-trust would be treated as if it were an IRA sub-account owned by that beneficiary.

The final regulations have provisions for what is generally referred to as a “look-through” trust.  Beneficiaries of a trust may be treated as designated beneficiaries providing four requirements are met:

(1)  The trust is valid under the appropriate state law

(2)  The trust irrevocable or becomes irrevocable on death of the grantor

(3)  The beneficiaries of the trust are readily identifiable from the trust instrument, and

(4)  A list of beneficiaries or a copy of the trust agreement is provided to the IRA custodian no later than October 31st of the year following the year of death

But, the final regulations provide that the separate account rules are not available to beneficiaries of a trust.  Therefore, in the case where a trust is the beneficiary of an account, the account must be paid out over the life expectancy of the oldest trust beneficiary.

This was illustrated in three Private Letter Rulings, 200317041, 200317043, and 200317044.  In those rulings, each beneficiary was forced to take required minimum distributions based upon the age of the oldest trust beneficiary even though the trust was divided into separate sub-trusts – one for each trust beneficiary.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.