401k distribution to a Trust IRA
Hello everyone, Happy Holidays
I came across this case where the deceased client’s 401k paid out a distribution to the trust beneficiary. According to the attorney, the trust may not qualify as a look-through since it is missing languages in the document. The client also had an existing IRA that has been converted to an inherited IRA with the trust title. My question is can the 401K distribution be rolled into the inherited IRA and retain the 5yr payout option?
Thank you for your assistance.
Permalink Submitted by Alan Spross on Fri, 2009-12-11 23:37
Since a non spouse beneficiary cannot do a rollover, the trust is stuck with a taxable distribution. If the trust was qualified for look through treatment, a direct rollover from the plan to an inherited IRA with the trust as beneficiary could have been done if the plan offered direct rollovers for non spouse beneficiaries. But once a distribution was done, this option is no longer available even if the trust had been qualified.
Permalink Submitted by mk foss on Sat, 2009-12-12 03:09
I think that someone should look more closely at whether the trust qualifies as a “see through” or not. The standards are so clear that most trusts will automatically qualify.
1. The trust must be legal (valid under State law)
2. The trust must be irrevocable or become irrevocable upon death of the owner
3. The trust must have identifiable beneficiaries
4. Trust documentation must be provided to the custodian or plan administrato by October 31 of the year after the owner’s death
None of these requirements (except number 3) would be found in the trust agreement itself. Take another look.
Permalink Submitted by Bruce Steiner on Sun, 2009-12-13 00:29
I agree with Mary Kay that someone should look more carefully at the trust to see if it qualifies for the stretchout. And if it doesn’t, it may be possible to decant it so that it will qualify.
For more on this, see my article on trusts as beneficiaries of retirement benefits, in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Tony Yang on Tue, 2009-12-15 16:23
Thank you for your response,
I read that the trust documents need to include language that excludes the use of IRA assets as potential asset that can be used to cover administration expenses. The trust documents I read did not have this added.. Maybe I am over analyzing it.
Permalink Submitted by mk foss on Tue, 2009-12-15 17:53
If the assets can be used to pay administrative expenses or estate taxes, it looks like the estate is a beneficiary as well as the trust. The estate has no life expectancy and would nullify the desired “stretch out.” Some people have suggested that the trustee document that no trust funds will be used to pay estate expenses after September 30 in the year following the death. Stating that in writing and following it is supposed to eliminate the estate as beneficiary because it cannot receive funds as of the beneficiary determination date (September 30 of the year after the death).
Permalink Submitted by Bruce Steiner on Tue, 2009-12-15 18:06
Why would a trust that is the beneficiary of an IRA pay the estate’s administration expenses (except in very unusual circumstances, in which case you probably couldn’t negate it)?
While it’s generally preferable not to have to tap the IRA to pay estate taxes, the default in most if not all states is that the recipients of nonprobate assets such as IRAs have to pay their pro rata share of the estate tax, and in some cases there aren’t enough other assets to allocate the estate tax elsewhere. But why should the estate tax allocation make the estate a beneficiary of the IRA?