The initial stretch is carried over, but there is no new stretch for non spouse beneficiaries.

To determine the amount of stretch available, it must first be determined whether the last grandparent to pass OWNED the IRA or maintained it in beneficiary status.
If owned, then the daughter’s life expectancy will apply for the daughter and daughter’s successor beneficiaries as well. The 22 and 24 year olds do not get a new stretch.

If the last grandparent to pass carried the IRA as a beneficiary instead of owner, the situation is much worse. In this case, even the daughter would have to continue the life expectancy distribution method used by the last GP to pass, and the 22 and 24 year olds would also have to distribute the IRA at that same rate. The IRA would be totally distributed in about 13 years.

If the daughter wants to limit the distributions, she would have to create a trust containing the limiting conditions, but whether the trust retained the RMDs or passed them through to the beneficiaries is determined by the terms of the trust. Trust tax rates are compressed and much higher than individual tax rates starting at fairly low levels of taxable income.

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A “trusteed IRA” is the common term for an IRA left in trust in a manner such that the dispositive terms of the trust are incorporated into the IRA agreement. There are a few financial institutions that offer this. For the reasons not to do this, see my article in the September 2009 issue of Trusts & Estates: http://www.kkwc.com/library_cat/uf_trusteed_IRA.pdf.

But the trusteed IRA isn’t really an issue here. In this case, as Alan pointed out (ignoring the possibility that the surviving grandparent never rolled the IRA over into his/her own IRA), the daughter can leave her inherited IRA to her children in trust rather than outright. She can do this by creating trusts for her children, either in her Will or in a separate trust instrument, and naming these trusts as the beneficiaries of her inherited IRA. She should check with the financial institution to see if she can do this by beneficiary designation, or whether they want her to do this under her Will.

Given the daughter’s concern about her children, she may want to give the trustees discretion as to the amount (if any) to distribute to her children each year. The trustees can take into account all of the facts and circumstances, including both the beneficiaries’ maturity, as well as the income tax rates. The (generally) higher income tax rates on trusts is sometimes a small price to pay to better protect the assets.

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