By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
An important deadline is fast approaching. This October 31st deadline applies to trusts that are beneficiaries of retirement assets of individuals who died last year.
A trust beneficiary cannot use stretch distributions from inherited retirement assets unless the trust meets four qualifications:
- The trust must valid under state law
- It must be irrevocable or become irrevocable at death
- The trust beneficiaries must be identifiable
- A copy of the trust must be given to the IRA custodian or the plan administrator by October 31st of the year after the account owner’s death
This last point is the one that often blows up the stretch option for the retirement assets. Many advisors are not aware of this requirement. In addition, it is the responsibility of the trustee of the trust to provide this documentation. Who is generally the trustee of the trust? The surviving spouse, a child, or a relative – none of whom are going to be aware of this requirement.
What happens if you miss this documentation deadline? The required distributions from the inherited account will depend on the age of the account owner in the year of death. If the account owner dies before reaching his required beginning date (April 1 of the year after turning 70 ½), then the retirement account must be emptied within five years. If the account owner dies after his required beginning date, required distributions from the inherited account will be calculated using the remaining life expectancy of the deceased account owner. In either case, the trust beneficiaries have a shortened life expectancy, which means accelerated payouts from the inherited retirement account and income taxes must be paid on these accelerated distributions, costing them a lot of money.
When things are done correctly, required distributions from the inherited retirement account will be made to the trust using the age of the oldest trust beneficiary (i.e., the stretch option).
Naming a trust as the beneficiary of a retirement account is a very tricky thing. This is just one more way that beneficiaries of retirement assets can inadvertently lose the ability to stretch distributions over their own life expectancies. It is highly recommended that you use an attorney familiar with the retirement distribution rules when drafting the trust. It would also be a good idea to get guidance from the attorney, at the time of drafting, on the procedures to follow at the death of the account owner. These instructions could save the trust beneficiaries a lot of money.
- There is an October 31st deadline for the trustee of a trust beneficiary to give a copy of the trust to the IRA custodian or the plan administrator
- When the trust documentation requirement is missed, required distributions to the trust are accelerated
- When the requirement is met, required distributions will use the age of the oldest trust beneficiary
- By Beverly DeVeny and Jared Trexler