Traditional IRA convert 2 stretch, post mortem,clarification
Reading the relevant section (Trust as Beneficiary, p 38 pub 590), I would guess we probably meet items 1-3. I’ve not seen the trust documents. The question remains, does the trust meet, or can it be made to meet, the fourth requirement? Is this what makes it ‘qualified’?
Trying to simplify the fourth requirement (including the next paragraph), I come up with the analysis below.
IRA has been provided with either
1. Copy of trust – with agreement to update if amended
or
2. All of a-d
a. List of all beneficiaries
b. Certification that list (see a) is correct and req.1-3 are met
c. Agreement that if trust is amended, IRA will be notified
d. Agreement to provide trust doc to IRA on demand
The deadline for beneficiary designation to the IRA is Oct 31 of the year following death. Does this mean that a-d can be met by Oct 31 of 2008?
The outcome sought here is for each beneficiary to have the option to convert a traditional IRA into a “stretch” IRA for their portion. Each beneficiary would still decide individually whether they wanted to cash out their portion or leave it as an FBO IRA.
To pursue this, allowing each beneficiary the most options, we need to know if trust is ‘qualified” and they also need to know if that with the trust as beneficiary, can the IRA be kept tax-deferred?
Brian
Permalink Submitted by Alan Spross on Sat, 2007-12-08 03:26
Your analysis is correct as to the requirements for a trust to be considered as qualified for look through treatment, and also regarding the 10/31 deadline date.
The above items permit the IRA to be distributed to the trust over the shortest life expectancy of the trust beneficiaries, but it is the specific trust provisions that control how and when the trust can distribute IRA funds out of the trust to the beneficiaries. Note that the separate account rules do not apply to trust beneficiaries, where each beneficiary gets to control their own account. Even if the trust were allowed to terminate and the IRA assigned to the beneficiaries, the life expectancy of the oldest beneficiary continues to be binding on the others unless the trust terminated prior to the deadline to establish separate accounts and the accounts were established prior to 12/31 following the year of death.
Of course, the purpose of many trusts is to limit the rate at which beneficiaries can tap the IRA funds, therefore even if the IRA can continue to grow tax deferred, the payments that are distributed to the trust can sometimes be retained in the trust.
Permalink Submitted by Brian Phillips on Wed, 2007-12-12 11:33
Part of your reply stated, “Even if the trust were allowed to terminate and the IRA assigned to the beneficiaries, the life expectancy of the oldest beneficiary continues to be binding on the others unless the trust terminated prior to the deadline to establish separate accounts and the accounts were established prior to 12/31 following the year of death.”
The trust will be temporary. How is the deadline to establish separate accounts determined? We want to get the timing right, if we can.
Brian
Permalink Submitted by Alan Spross on Thu, 2007-12-13 01:51
The deadline to establish separate accounts is 12/31 following the year of owner’s death if multiple individual beneficiaries are to be allowed to each use their own life expectancy. However, with a trust named beneficiary there are other dates to be considered:
1) 9/30 of the year following death if the trust is allowed to terminate and the trust is terminated by that date. If so, the trust can be ignored and whether the trust is qualified or not is moot.
2) 10/31 of the year following death for a still active trust to provide the required date to the IRA custodian per p 38 of IRS Pub 590. This establishes if the trust is qualified for look through treatment or not. If this date is not met, the trust is considered non qualified.
3) 12/31 of the date following death for the trust beneficiaries to establish separate accounts. This allows the beneficiaries of a trust teminated prior to 9/30 to use their own life expectancies in the respective account. However, if the trust was non qualified and terminated after 9/30, then the separate accounts would be subject to the non individual RMD requirements and the 5 year rule would apply if death was prior to the RBD, or the decedent’s remaining life expectancy if death was post RBD.
As such 9/20 becomes the first critical date for a trust to affect the RMD schedule for it’s beneficiaries.