My brother and I are court appointed co-trustees of a see-through conduit trust named as bene on Dad’s IRA. The trust terminates on Dec. 31, 2020 with the remaining trust property ($1M) distributed outright to my brother and myself on or before that date.
We are planning to transfer the funds in the current Inherited IRA (trust beneficiary) split into our own Inherited IRAs by doing 2 IRA-to-IRA transfers. Fidelity Retirements Team directed us to set up individual Inherited IRA accounts and use their ‘Transfer Between Existing Fidelity Accounts’ form to move our shares into the new accounts and she suggested we do it now, before the end of the year. They do not have a form for this type of transfer. She said we would need to attach a Cover Letter to each transfer request explaining exactly what we are doing. She suggested we should get an attorney’s assistance writing the cover letters.
We have been receiving MRDs based on the elder brother's age through K-1s and our accountant has filed Federal and NYS returns for the trust since 2010. Twice New York State has made us correct minor errors our accountant made in those filings.
The trust IS a beneficiary of the IRA, and Fidelity has all the required documentation to verify see-through status including a copy of Dad's Will.
But that trust instrument also has this language in it:
"On December 31, 2020 I direct my Trustee to distribute the remaining trust property outright to my child.
If my child dies before receiving the entire trust assets, any remaining balance shall be paid to those persons whom and in the shares which my child designates by Will, excluding my child, his estare, his creditors, or the creditors of his estate. This limited power of appointment shall be exercised by my child exclusively and in all events, but only by specific reference to this power in my child's Will.
If my child fails to exercise completely the limited power of appointment granted above, then I give the remaining balance not appointed by my child, to such child's then living issue, per stirpes, subject, however, to the "Postponement of Possession" article of my Will, or if my child dies without issue, I give the remaining balance to the [City Name] Public Library."
Should we be concerned that the transfers might raise red flags for either the IRS or New York taxing authority? For instance, would they want to verify that the trust qualifies for see-through treatment? I ask because it looks like the [City Name] Public Library could be considered a remainderman beneficiary. Also, my brother and I are both childless (I had my Will changed to specifically reference that power of appointment). Or am I worrying about nothing since the issue has not been challenged for the last 10 years? Thank you! Andrew