Trustee’s Actions Regarding Beneficiary IRAs

Trustee’s Actions Regarding Beneficiary IRAs

Division of an individual retirement account is permitted and doesn’t constitute a taxable distribution or rollover

In Private Letter Ruling 201503024 (released Jan. 16, 2015), a trustee of a trust that was a beneficiary of a decedent’s individual retirement account requested six rulings under Internal Revenue Code Sections 401(a)(9) and 408.  The trustee divided the original IRA into five separate IRAs and sought to distribute the five IRAs into new IRAs.  Each separate IRA would be for the benefit of one of five beneficiaries of the original trust.

The Terms of the Trust

The decedent established a revocable trust and died several years after reaching age 70 ½.  He also owned an IRA, of which the trust was the primary beneficiary.  Under the terms of the trust, the trustee was to pay debts and expenses and make distributions to the decedent’s spouse and another beneficiary.  The remaining assets were to be divided equally among the decedent’s five children, and each share was to be distributed outright to each child who reached 30 years of age.

After the decedent died, the trustee established a new IRA (IRA B-1), in the name of the trust as the beneficiary of the decedent’s original IRA.  The trustee then transferred assets of the original IRA to IRA B-1.  The trustee established four more IRAs (IRA B-2, B-3, B-4, B-5) and transferred one-fifth of the assets of IRA B-1 to each of them.  All of the transfers were made as trustee-to-trustee transfers. 

On a later date, the trustee transferred the assets of IRA B-3 and B-4 to new IRAs, B-6 and B-7, respectively.  IRAs B-1, B-2, B-5, B-6 and B-7 were part of the original trust residue, and the trustee sought to distribute each IRA to each of the five beneficiaries, through trustee-to-trustee transfers.  The trustee intended that each distributed IRA be considered an “inherited IRA” under IRC Section 408(d)(3)(C) and that the required minimum distributions (RMDs) from each beneficiary IRA be determined based on the life expectancy of the oldest beneficiary on Sept. 30 of the year following the decedent’s death.

Ruling 1: See-through Trust

The trustee first requested that the Internal Revenue Service consider the trust a see-through trust under Treasury Regulations Section 1.401(a)(9)-4, Q&A 5.  Under that section, when a trust is named as a beneficiary of an employee, the trust isn’t a designated beneficiary; however, beneficiaries of a trust with respect to a trust’s interest in an employee’s benefit may be treated as designated beneficiaries if certain requirements are met.  These requirements are: (1) the trust is valid under state law, or would be but for the fact there’s no corpus; (2) the trust is irrevocable or will, by its terms, become irrevocable on the employee’s death; (3) the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable within the meaning of Treas. Regs. Section 1.401(a)(9)-4, Q&A-1, from the trust instrument; and (4) relevant documentation has been timely provided to the plan administrator.  Given that the trust was valid under state law; was irrevocable on the decedent’s death; contained identifiable beneficiaries; and the trustee gave a copy of the trust agreement to the custodians of the separate IRAs, the trust constituted a see-through trust with respect to the original IRA and all of the separate IRAs.

Ruling 2: Inherited IRAs

The trustee asked the IRS whether the five beneficiary IRAs are inherited IRAs within the meaning of Section 408(d)(3)(C).  Under that section, an IRA is an inherited IRA if the individual for whose benefit the IRA is maintained had acquired the IRA by reason of an individual’s death, unless the acquiring individual is the surviving spouse.  In this instance, the beneficiaries acquired the IRAs by reason of the decedent’s death, and none of the individuals were the decedent’s surviving spouse.  Thus, the five beneficiary IRAs are inherited IRAs.

Ruling 3: Division of IRAs

The trustee next asked whether Sections 401(a)(9) and 408 preclude the division of the original IRA and the establishment of the five beneficiary IRAs.  Although Section 409(a)(9) precludes separate account treatment when amounts pass through a trust, the IRC and the Treasury regulations don’t preclude a posthumous division of a decedent’s IRA into more than one IRA.  Therefore, the division of the original IRA into five beneficiary IRAs, each in the decedent’s name for the benefit of each beneficiary, is permissible.

Rulings 4 and 5: Trustee-to-Trustee Transfer Implications

For its third and fourth request, the trustee asked the IRS whether the trustee-to-trustee transfers constitute taxable distributions, payments or attempted rollovers.  The trustee also asked whether the trustee-to-trustee transfers would cause the beneficiary IRAs to lose their qualified status under Section 408(a). 

The IRS noted that, in general, under Section 408(d)(1), amounts distributed or paid out of an IRA are taxable to the distributee or payee.  Moreover, amounts from inherited IRAs may not be rolled over to another IRA.  However, a trustee-to-trustee transfer doesn’t constitute a payment or a distribution.  And, such a transfer is permissible after an IRA holder’s death on behalf of the beneficiaries of a decedent’s IRA. Thus, there’s no taxable distribution; no payments; and no attempted rollovers.  Furthermore, the transfers don’t cause the IRAs to lose their qualified status. 

Ruling 6: Designated Beneficiaries and Life Expectancies

Finally, the trustee asked whether each beneficiary may receive RMDs from his respective beneficiary IRA using the life expectancy of the oldest of the beneficiaries who remains a beneficiary on Sept. 30, 2014.  Under Treas. Regs. Section 1.401(a)(9)-5, Q&A-7(a), if there’s more than one designated beneficiary of a trust, the beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the applicable distribution period.  To determine life expectancy, the trustee must use the “Single Life Table” in Treas. Regs. Section 1.401(a)(9)-9, Q&A-1.  The five beneficiaries are designated beneficiaries of the original IRA.  As such, they may each receive the RMDs from their respective beneficiary IRAs using the life expectancy of the oldest of such individuals who remains a beneficiary on Sept. 30, 2014.

 

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