Use of a trust beneficiary to determine RMD stretching options
Facts:
1. IRA owner died in January 2012. There is no surviving spouse.
2. IRA beneficiary is a trust(trust #1) which has another trust(trust #2)as the sole beneficiary. Trust#1 has no other assets other than the IRA via a beneficiary designation.
3. Trust #2 has one beneficiary that is another trust(trust #3). Trust #2 has some other assets.
4. Trust #3 is a family trust that has two individuals(children of the IRA owner) as the only beneficiaries. Distributions are discretionary. Trust #3 has some other assets.
5. I believe the IRA trustee was given a copy of all of the trust documents.
Question: Since the two individuals are the ultimate recipients of the IRA monies distributed, can you “look through” three trusts to determine if you can use the lifetime of the oldest child to compute the RMD or….do you have to comply with the 5 year rule to determine the annual RMD? Is there any way to avoid the 5 year rule?
Permalink Submitted by Bruce Steiner on Wed, 2013-02-27 23:29
Perhaps. It depends on the terms of the trusts. For more information, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf. Why would anyone leave an IRA to trust #1 whose only beneficiary is trust #2 whose only beneficiary is trust #3? Why not simply leave the IRA to trust #3? Given such an unusual estate plan, the attorney handling the estate should review the trusts carefully.
Permalink Submitted by mk foss on Fri, 2013-03-01 02:14
How old was the IRA owner at death? The five-year rule only applies if there is no “designated beneficiary” when the owner dies before RMDs begin. If the individual was receiving RMDs before death, his/her life expectancy is used if there is no “designated beneficiary.” A “designated beneficiary” has a life expectancy. When there’s just one trust, it’s easy to look through the trust and find a life expectancy. With so many trusts, it’s difficult to know who the oldest beneficiary would be to determine RMDs after death.