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