One of the most fundamental rules of minimum distribution planning is to spread out the receipt of retirement funds–and thus the taxation of them–for as long as possible. Final regulations under Section 401(a)(9) simplified the ways of achieving this objective. But a private letter ruling issued recently defied the logic of the regulations when it comes to determining the life expectancy of a trust beneficiary.
The ruling involved a grandmother who had set up a trust to provide support for her two grandchildren, and had named the trust as beneficiary of her IRAs. In the event of her death, the trust would support each of the two grandchildren (ages 5 and 6) until they reached age 30, at which time the trust would terminate. The trust included a provision that in the remote event that both children died before age 30 without leaving any children of their own, the proceeds were to go to an elderly great-uncle, who was 67.
The grandchildren were ages 5 and 6 when their grandmother died. The advisors involved in making the payout arrangements requested a letter ruling as to the life expectancy requirements for the IRA distributions–not surprising since three different sets of regulations have affected this area in the past two years.
When a trust is named as beneficiary of an IRA, the general rule is that as long as four basic requirements are met, the life expectancy of the individual beneficiary of a trust can be used as the measuring life for RMD purposes. The grandmothers trust met all of these requirements. (Generally, these four requirements are: (1) the trust must be valid under state law, (2) the trust must be irrevocable or become irrevocable at death, (3) the beneficiaries of the trust must be identifiable from the trust instrument, and (4) certain documentation must be provided to the IRA trustee as to the identity of the trust beneficiaries.)