Recent rulings by the IRS sets forth useful guidelines for people with sizable IRAs in their estate, and multiple claimants on the assets within.
The rulings concerned a person who had set up a revocable trust containing an IRA, intended to benefit his five children. The decedent was past the age of 70 ½ prior to his death, and had begun receiving minimum required distributions from the IRA. After the death of the original owner of the IRA, the trustee broke the IRA into five smaller IRAs, which were to be held in trust for each of the children, then distributed at age 30.
This opened a can of worms with the IRS, which issued a series of rulings to deal with the situation. Let’s take them one at a time:
Division of IRAs
In maybe the most important ruling, the IRS needed to determine whether the trustee’s division of the original IRA into five accounts was legal, since IRS regulations preclude separate account treatment when amounts pass through a trust. But there’s no specific regulation that disallows a posthumous division of one IRA into multiple IRA. Therefore, the IRS ruled that the five new IRAs were perfectly legal.
The IRS also needed consider whether trustee-to-trustee transfers constituted taxable distributions or attempted rollovers. Generally, a trustee-to-trustee transfer doesn’t qualify as a distribution when it’s done upon the decedent’s death, as happened here.
But given the unusual nature of the case, it was important to have the tax treatment clarified. Assets distributed from an IRA are usually taxable to the recipient. In addition, inherited IRAs are not generally treated as rollover IRAs, but that needed to be clarified as well.
In both cases, the IRS agreed with the trustee. The transfers leading to the creation of the separate IRAs were not treated as either taxable distributions or as attempted rollovers.