Trust-Inherited IRA Annuity

Decedent (D) held IRA annuity at Company A. D has died naming his living trust a beneficiary. Sole beneficiary of living trust is D’s child, C. C desires to have the inherited IRA moved to another company, B, and have the benefits payable to C under C’s social security number. If C can get A to issue a lump sum distribution check directly to B fbo “the D inherited IRA”, will this be sufficient to avoid current income taxation on the lump sum?

Is there any problem with trying to move away from the EIN of the Trust (which is likely what A will use to report the distribution) to the SSN of the child (which C will use in establishing the new accont at B)?

C is trying to get away from having to file a 1041 for the trust for all the subsequent years the IRA will be paid out under a stretch program based upon C’s lfe expectancy. Is this impossible to do, or is there a better course of action that should be pursued to achieve the desired result?



The problem is that a direct trustee transfer can only be done between accounts of identical ownership, in this case beneficial ownership which resides in the trust.

Perhaps the terms of the trust allow it to terminate in the near term, and the IRA can then be assigned to the sole trust beneficiary, who would have been allowed the stretch providing the requirements for look through treatment had been met. And if they had been met, the life expectancy distributions can still be taken, but paid first into the trust. In addition, the IRA custodian can be changed by direct transfer providing the registration of receiving IRA is the same, ie. the trust as beneficial owner.

It is also possible in this example that C could be looking to circumvent other terms built into the trust by the trustor . One example might have been for a special needs trust or to provide some creditor or spendthrift protection for the child. To avoid legal problems, an IRA custodian is not going to issue distributions to other than the trust EIN until they are sure that the trust can properly be allowed to terminate.



Part of the prior response was unclear to me. FIrst, it stated:

“Perhaps the terms of the trust allow it to terminate in the near term, and the IRA can then be assigned to the sole trust beneficiary “.

Assuming that the termination is permitted by the terms of the Trust and accepted by the Custodian, will there be any adverse income tax reporting flowing from the assignment to the individual beneficiary? What, if anything, with the Custodian issue by way of a 1099-R or W-2P at the end of the year in which the assignment is completed?

Following, it states:

“the life expectancy distributions can still be taken, but paid first into the trust”.

This makes it appear that the assignment will not accomplish the goal of eliminating tax reporting that the Trust level (1041). So, can we get to the point of an account titled “The [Decedent] inherited IRA fbo [the individual beneficiary]” and have it registered in the social security number of the individual?



There should be no 1099R, since the assignment is not a taxable event. Of course, this only applies to funds that are still in the IRA, not to funds that have already been distributed to the trust. Following is a link to a Natalie Choate article on various issues connected to these assignments:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm

The other point I made was not very clear. What I meant to convey is that if the trust cannot be terminated, if it met the requirements for look through treatment, the stretch would still be available, but the funds would have to be paid first to the trust, and then passed through to the trust beneficiary on a K1. However, if the trust does NOT qualify for look through treatment, even getting the assignment done would not result in qualification for life expectancy treatment for the trust beneficiary. For things to work as you wish, you need to both get the assignment approved PLUS the trust must be qualified. If the trust is not qualified, it is construed to be a non individual beneficiary, and RMDs would follow those rules which depend on whether the owner passed on or after the RBD.

If the current IRA custodian balks at assignment with no valid reason, then a direct transfer to another custodian might result in a different conclusion about assignment of the IRA to the trust beneficiary. This is mentioned in the above article.



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