Combining Inherited IRA Accounts

An interesting question came up recently that went something like this… Mom died with two IRAs. She had two children, who we will call Deborah and Edward. The beneficiary of one of her IRAs was her children, 50% each. The beneficiary of the other IRA was a trust for the benefit of her children. Each child was a 50% beneficiary of the trust. The trust language called for it to collect certain assets and then terminate by distributing those assets to the trust beneficiaries (this is generally the WORST type of trust to name as an IRA beneficiary). Since the trust was terminating, the IRA was split and distributed out of the trust to properly titled inherited IRAs for the trust beneficiaries, Deborah and Edward.

The trust was the beneficiary of one of the IRAs, so the trust rules are used for calculating required distributions from that IRA. The children do NOT get to use their own life expectancies. They must both use the life expectancy of the oldest child. Since Deborah is the older child, Edward must use her life expectancy, even after the IRA is distributed out of the trust when the trust is terminated.

At this point, Mom’s two IRAs have been split into four inherited IRAs, two for each child (one each that they inherited directly and one each that they inherited through the trust). Can these inherited IRAs be combined? Normally the answer would be yes. A beneficiary can combine IRAs inherited from the same individual. But in this case, we actually have three beneficiaries, Deborah, Edward, and the Trust. Edward ends up with two IRAs inherited from his mother and has to use two different ages for calculating his required distributions (his own age for the IRA he inherited directly and Deborah’s age for the IRA he inherited through the trust). Edward cannot combine those two accounts. Perhaps Deborah could combine her two accounts since they are both using her age to calculate the required distributions even though one of the inherited IRAs passed through the trust. Doing so, however, would be going out on a limb, since there is no guidance from IRS that directly addresses this issue.

The important point to remember here is that when a trust is named as the beneficiary of an IRA, the trust is the beneficiary – not the spouse or the children who are named as the beneficiaries of the trust. You only have one beneficiary, the Trust. You use only one age to calculate required distributions. The IRA funds are not the property of the trust beneficiaries, they are the property of the trust.

If you are considering using a trust as the beneficiary of a retirement plan, you need to find an attorney who not only can draft a trust, but who also knows the retirement plan distribution rules. Those attorneys are not easy to find.