Inherited IRA/Changing from Trust to Individual Beneficiary
The client of an IRA listed his Trust as his beneficiary. The sole beneficiary of the trust is his son. The father died in March 2008. The IRA was set up as Inherited IRA James Smith Deceased (3/1/08) FBO of James Smith Trust.
The son and his tax attorney would like to change the name of the inherited IRA from FBO Trust to FBO son. According to them, that would allow them to terminate the trust and continue the RMDs directly to the son who is the oldest and only beneficiary of the trust therefore eliminating having to file an annual trust return and paying taxes at a higher rate on the trust. The clearing firm is standing fast and refusing their request stating they must go and get a Private Letter ruling from the IRS on this particular case in order for them to make the change.
Who is correct, the client and their attorney or the clearing firm?
Permalink Submitted by mk foss on Fri, 2009-02-13 19:21
Natalie Choate discusses transferring the IRA to the trust beneficiary and gives a sample letter in her book but doesn’t go into how to persuade a custodian to act on it. Perhaps the IRA could be transferred to another custodian that would allow the change.
Permalink Submitted by [email protected] on Fri, 2009-02-13 19:31
Do you know the name of the book and by chance the page it is on? I would hate to send the client to another custodian.
Permalink Submitted by Bruce Steiner on Fri, 2009-02-13 22:35
What are the terms of the trust?
It may be advantageous to keep the IRA payable to the trust, if that will allow the proceeds to be kept out of the son’s estate, and to be better protected from the son’s creditors.
Presumably the IRA owner had some reason for providing for his son in trust rather than outright.
Permalink Submitted by [email protected] on Sun, 2009-02-15 01:06
The terms of the trust where that everything goes to his son with no restrictions. I think they listed the trust based upon advice they recieved from their estate attorney not understanding the ramifications of that decsion until AFTER the father died.
Permalink Submitted by Bruce Steiner on Sun, 2009-02-15 02:20
If in fact the trust assets are payable to the son outright, then the trustees should be able to transfer the IRA to the son. If the IRA custodian won’t let the trustees do so, the trustees should (i) set up an inherited IRA with the existing custodian, (ii) set up an inherited IRA with a different custodian (preferably the one where the son wants to keep it), (iii) move the inherited IRA to the new custodian, and (iv) transfer it to an inherited IRA for the son with the new custodian.
Why would anyone go through the cost and complexity of creating a trust that ends upon his death with payout to his son outright and naming that trust as the beneficiary of his IRA, when he could have simply named his son as the beneficiary of the IRA?
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Anonymous (not verified) on Wed, 2009-02-18 17:01
What I do not see in any of these responses is evidence that this is allowed by IRS regulation. Can anyone provide specific IRS regulation where this is permitted. The current custodian has stated that IRS regulations do not permit this unless there is a private ruling letter. In addition, the private ruling letter must be specific to this individual…meaning you cant use a private ruling letter that your neighbor used for his own particular case.
[quote=”bsteiner”]If in fact the trust assets are payable to the son outright, then the trustees should be able to transfer the IRA to the son. If the IRA custodian won’t let the trustees do so, the trustees should (i) set up an inherited IRA with the existing custodian, (ii) set up an inherited IRA with a different custodian (preferably the one where the son wants to keep it), (iii) move the inherited IRA to the new custodian, and (iv) transfer it to an inherited IRA for the son with the new custodian.
Why would anyone go through the cost and complexity of creating a trust that ends upon his death with payout to his son outright and naming that trust as the beneficiary of his IRA, when he could have simply named his son as the beneficiary of the IRA?
Bruce Steiner, attorney
NYC
also admitted in NJ and FL[/quote]
Permalink Submitted by Anonymous (not verified) on Fri, 2009-02-20 01:16
[quote]What I do not see in any of these responses is evidence that this is allowed by IRS regulation. Can anyone provide specific IRS regulation where this is permitted. The current custodian has stated that IRS regulations do not permit this unless there is a private ruling letter. In addition, the private ruling letter must be specific to this individual…meaning you cant use a private ruling letter that your neighbor used for his own particular case. [/quote]
There isn’t anything that specifically points to this in the IRS regulation. The only authority on it is through PLR’s and as we all know a PLR cannot be relied upon as authority by anyone other than the taxpayer who obtained it.
More importantly, even if the IRS specifically allowed it, the custodian doesn’t have to accomodate it. Off the top of my head Fidelity is the only one I have heard that will do it.