Required Minimum Distribution Planning With Trusts: More IRS Flexibility?

(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 However, after the IRA owners death, additional amounts had been withdrawn from the IRA (prior to the Sept. 30 following his death) to pay administration expenses and estate taxes. No other amounts were expected to be withdrawn after Sept. 30 of the year following death, except trust-related expenses (e.g., investment expenses, attorney fees, trustee fees) but the rulings indicated that the latter might still be withdrawn at a later date.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.