Ruling to Remember
Private Letter Ruling 201038019
"Jeff's" trust is the beneficiary of two IRAs at two different financial institutions. "Jeff's" three children are the beneficiaries of the trust. The trust does not limit the childrenís access to the IRAs. A copy of the trust was given to each IRA custodian (i.e. financial institution) by October 31st of the year after "Jeff's" death. This allows the age of the oldest trust beneficiary to be used in calculating required minimum distributions (RMDs).
The three children propose to open six inherited IRAs, one for each child for each of the two IRAs. (2+2+2=simple math!) The IRAs will be in the name of "Jeff for benefit of the trust share for (insert respective childís name)." The funds move trustee-to-trustee from "Jeff's" two IRAs to the six inherited IRAs. After that, the children will open six more inherited IRAs in the name of "Jeff for the benefit of (insert respective childís name)." The IRA funds move via trustee-to-trustee transfers from the first six IRAs to the six IRAs for the benefit of each child.
What happens? The IRS granted all ruling requests, allowing the children to do what they proposed. The children end up with inherited IRAs in their own names that ignore the trust. They do NOT get to use their own life expectancies, but must use the life expectancy of the oldest child.
LESSONS TO LEARN:
1. The trust was unnecessary in this case and the children have to go through a lot of steps to get to an inherited IRA in their own names. "Jeff" could have simply named the children directly on the beneficiary form, in which case they could have used their own life expectancies. Instead, they had to pay the IRS fee of $10,000 for this ruling.
2. Financial institutions need to be more aware that these transactions can be done in instances where the trust allows unlimited access to the funds or in instances where the trust terminates. A distribution of the IRA out of the trust to the trust beneficiary need NOT be a taxable event if the funds are moved in a trustee-to-trustee transfer (no check is made payable to the trust) and the new inherited account title contains the name of the decedent and states that it is an inherited account.
3. It is important to make sure that the trust documentation requirement is met. Trustees of trusts where IRA owners died in 2009 only have until October 31, 2010 to provide a copy of the trust to the IRA custodian or plan administrator (or a list of the trust beneficiaries and their entitlement). Without this documentation, the distributions to the trust will be accelerated, which means taxes on those distributions will be due sooner and tax may be assessed at the higher trust tax rates.