Required Minimum Distribution Planning With Trusts: More IRS Flexibility? Recent private letter rulings may reflect a trend
By April Caudill
The Internal Revenue Service has clarified some issues recently concerning the use of trusts as IRA or qualified plan beneficiaries, and the consequences of the designations for required minimum distribution (RMD) purposes. These rulings may reflect a trend toward flexibility by the IRS with respect to planning with trusts and RMDs.
Three of the private rulings were identical, as they were obtained by the three adult children of one IRA owner. The fourth ruling was similar but was issued to another unrelated party some weeks later. In the first three rulings, the IRA owner died at the age of 63, owning an IRA of which a trust was named as beneficiary. The IRA was the only asset of the trust. The terms of the trust required that its proceeds be divided equally to the owners three children. As is the case in most rulings like this, the goal of the adult children was for each to be able to take payouts over his or her life expectancy, rather than all having to use the life expectancy of the oldest beneficiary.
The key proposal of the letter rulings was that the trust be permitted to subdivide the IRA into three IRAs for the three children, with the IRAs making payouts to each child over his or her own life expectancy. It is clear that this cannot happen without the trust being a “designated beneficiary” (trusts meeting these requirements are commonly referred to as “see-through trusts”).
Briefly, to meet these requirements, the trust must: (1) be valid under state law,
(2) be irrevocable (or become so at death),
(3) identify the beneficiaries of the interest in the trust, and
(4) satisfy a documentation requirement by providing certain information to the plan administrator.
The ruling requests indicated that all these requirements were met. However, after the IRA owners death, additional amounts had been withdrawn from the IRA (prior to the Sept. 30 following his death) to pay administration expenses and estate taxes. No other amounts were expected to be withdrawn after Sept. 30 of the year following death, except trust-related expenses (e.g., investment expenses, attorney fees, trustee fees) but the rulings indicated that the latter might still be withdrawn at a later date. In addition, the trust remained potentially liable for estate taxes. The IRS determined that these facts and provisions would not preclude the trust from operating as a “see-through” trust, meaning it could remain a “designated beneficiary” for RMD purposes.
In addition, the IRS determined that the trust could distribute the IRA assets as three separate inherited IRAs, as required by its terms, and that for purposes of IRC Section 401(a)(9), payments from each sub-IRA could be made directly to the beneficiaries free of the trust, based on their own life expectancies. In the absence of such an assignment, the governing life expectancy would have been that of the oldest beneficiary, as determined in three letter rulings issued simultaneously last year.
In the fourth private ruling, the decedent owned two IRAs, both payable to a trust. The trust included provisions permitting use of the trust proceeds to pay estate taxes, funeral expenses, debts and medical expenses (all standard provisions in many testamentary trusts). Nonetheless, none of these expenses actually had been paid from trust proceeds. The trust beneficiary was the owners surviving daughter. The ruling requested that the IRAs be permitted to retitle the IRAs in the childs name and that payouts be determined using the childs life expectancy.
Following a lengthy analysis of the facts, the IRS determined that the trust satisfied all the requirements to be the designated beneficiary of the IRAs. The IRS further permitted the payout to the daughter based on her life expectancy, both before the IRAs were retitled and afterward, with no adverse tax consequences.
While these rulings may signal a more reasonable approach by the IRS, advisors must still deal with IRA providers and custodians who may be unwilling to make beneficiary distributions in reliance on the nuances of private rulings, which technically are not reliable as precedent. (Let. Ruls. 200432027, 200432028, 200432029, 200433019.)
April Caudill, J.D., CLU, ChFC, is managing editor of Tax Facts and ASRS, publications of the National Underwriter Company. She can be reached via e-mail at [email protected].
Reproduced from National Underwriter Edition, October 7, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.