Trust is beneficiary of IRA

A client passed away. The beneficiary of her IRA was her trust which was set up as a flow through trust naming her two daughters as the ultimate beneficiaries. I am being told that we have to transfer the IRA into a beneficiary IRA owned by the trust but can not transfer from there to beneficiary IRA’s owned by the daughters unless we get a private letter ruling from the IRS. Is this correct? Thanks, Sally



No, a PLR should not be necessary to transfer the IRA out of the trust.

As long as the trust provisions allow the trustee to terminate the trust or to distribute the IRA to beneficiaries, the daughters should be able to set up separate inherited IRA accounts. Some IRA custodians may balk, but as the following article points out, there are several other IRA custodians who will and the IRA could be directly transferred to one of them:

http://www.ataxplan.com/bulletinBoard/ira_providers.cfm



It is correct that when the trust is the IRA beneficiary a new inherited or beneficiary account must be opened to hold the IRA funds.Not every custodian would require a Private Letter Ruling for the beneficiaries to transfer their interests in the trust-as-beneficiary IRA. Natalie Choate in her [u]Life and Death Planning for Retirement Benefits [/u]book gives an example of a letter used to request that a custodian transfer benefits to the beneficiaries.

The trustee of the trust must follow the trust agreement, it doesn’t make sense that the custodian would reuire a private letter ruling to comply with the trust agreement. The beneficiary IRA for the trust could be transferred to another institution that is more flexible.



Why would anyone create a trust to receive the IRA benefits and then have the trust distribute its assets immediately?

If the amount involved is sufficient, we would have the IRA go to separate trusts for the daughters. If not, we would have it go to the daughters outright.

But as Alan and Mary Kay said, you should be able to get the custodian to allow you to transfer the IRA to inherited IRAs for the daughters, or if not then switch it to another custodian that better understands this.



depends on age of daughters, right?



I don’t see how it depends on the age of the daughters.

If each daughter’s share is sufficient to warrant administering a trust, we would have the IRA owner designate separate trusts for each daughter (or the issue of a deceased daughter) as the beneficiaries. If not, we would have the IRA owner designate the daughters (or the issue of a deceased daughter, with some adult person as custodian under the Uniform Transfers to Minors Act as custodian for anyone under age 21) as the beneficiaries.

There’s no reason to create a combined trust, have the IRA go to the combined trust, and then have the combined trust immediately terminate and distribute its assets to the daughters outright. All that accomplished was that the original poster says he or she was told that the trustees needed to get a private letter ruling, and he or she will have to explain to the financial institution why that’s not the case.

For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf



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