IRA payable to an Estate with a pour over will to a trust. Can they become inherited IRA’s.

Submitted by Michael Lott on Wed, 2014-08-20 22:54

Client had his estate as beneficiary of an ira. The estate has a pour over will to his trust, and the trust beneficiaries are 5 children. Can the trust create an inherited ira and use the oldest child for rmd’s? Also, there was a much smaller ira that had the trust as the beneficiary. Can an inherited ira be opened for that account and then transferred into the other larger inherited ira (assuming one can be created with the larger ira that came from the estate as long as they are titled the same?)

In addition, several of the children want cash and the others wish to continue with an inherited ira if possible. Our thought was to create 5 inherited ira accounts, all with the same title and tax id, then let each child do what they want. We are under the impression once again that they would all have to use the oldest child’s age to figure rmds no matter what. Since they would all have equal dollars in the 5 accounts could each ira name one of the children as beneficiary?

Pretty confusing. Thoughts or advice?



Submitted by Alan - IRA critic on Thu, 2014-08-21 03:09

  • The trust must be specifically identified in the IRA beneficiary clause. A testementary trust will qualify if it is listed as such, but an IRA that simply uses a pour over will and does not mention the trust will not. Therefore, the trust will not be qualified for look through treatment and will be treated as a non individual beneficiary like an estate. That means the 5 year rule will apply if IRA owner passes prior to the RBD, and the remaining life expectancy of that owner if owner passes on or after the RBD. Therefore, the IRA beneficiary clause needs to be updated to include reference to the trust by naming it as beneficiary.
  • Now let’s assume that the trust has been named as beneficiary and it meets all the requirements for look through treatment. If the trust document permits the IRA to be distributed out of the trust, then the trustee can have each child’s interest transferred to an individual inherited IRA account, but all such accounts will be subject to RMDs based on the oldest trust beneficiary. If there are other IRA accounts with a different trust as beneficiary, that IRA may well have a different RMD divisor and therefore cannot be combined with other inherited IRAs even though inherited from the same decedent. If the RMDs are the same, then they can be combined.
  • Having a single IRA with 5 beneficiaries would be an accounting and tax filing nightmare and most custodians would probably refuse to allow that format. Each beneficiary should have their own inherited IRA under their SSN and they can then manage it without coordinating with the others, including naming their own successor beneficiaries. They can take a lump sum distribution if they wish and are willing to inflate their tax bracket for that year, or they can stretch the inherited IRAs using the life expectancy of the oldest trust beneficiary. That continues to apply even after the oldest trust beneficiary dies.
  • If total distributions are made to certain beneficiaries prior to 9/30 of the year following the year of the owners death, the age of those beneficiaries would no longer be considered in determining the oldest beneficiary. Same if beneficiaries disclaimed their interest.

Submitted by Michael Lott on Mon, 2014-08-25 21:30

Thanks for your answers. They are a huge help.

Submitted by Elizabeth Herp on Fri, 2016-03-25 21:23

Hello, I have been trying without success to find law on the issue of whether an IRA naming the estate as beneficary can still qualify for look through treatment when there is a pour over will transferring the entire estate into a living trust. I was happy to come across this exact issue in your forum, but I wondered if you could possibly point me to a cite for the rule stated above that an IRA that simply uses a pour over will and does not mention the trust will not be qualified for look through treatment and will be treated as a non individual beneficiary.  Would I find this in the internal revenue code?  A client/trustee has this very question, where the decedent’s IRA named his estate as beneficiary, but his will poured the entire estate into a trust with decedent’s two under-30-yr-old nephews as beneficiaries.  The trust contains the following provision clearly meant to qualify the trust as a designated beneficiary: “Each trust (herein) is expressly intended to comply with the requirements of Proposed Treas. Reg. § 1.401(a)(9)-I, Q&A D-5 through D-7, so that the Settlor may designate the trust as the “Designated Beneficiary” of his Qualified Retirement Plans (within the meaning of said Proposed Regulations). Each trust…shall be recognized for purposes of administering the Settlor’s Qualified Retirement Plans even if the trust would otehrwise be invalid under (California law) for lack of trust corpus.  It is the Settlor’s responsibility during his lifetime to deliver appropriate documentation to the plan administrator of each of his Qualified Retirement Plans consistent with the requirements of Proposed Treas. Reg. § 1.401(a)(9)-I, Q&A D-5 through D-7(a).  It is the Trustee’s responsibility, no later than Nine months after the Settlor’s death, to deliver appropriate documentation to the plan administrator of each of his Qualified Retirement Plans consistent with the requirements of Proposed Treas. Reg. § 1.401(a)(9)-I, Q&A D-5 through D-7(b).”   Apparently the client/trustee, her CPA, and Merrill Lynch transferred the IRA funds to an IRA titled in the name of the trust, based on the premise that the IRA was transferred to a qualified trust under the treasury regulations above, so that the IRA was being paid out over the lifetime of the oldest nephew. Client then transferred the IRA to Ameriprise (for reasons I’m not sure of), and Ameriprise is now saying the IRA should have already been paid out under the 5 year rule.  We want to move it back to Merrill Lynch and resume the prior arrangement, but I am trying to determine if the IRA is subject to the 5 year rule or not.  Would the trust language above qualify it as a designated beneficiary (assuming the other requirements for a qualifying trust are met), or does the fact that the IRA beneficiary was the estate preclude this?  Is there specific law on point for this?  I realize this is quite complicated, but any help or pointers you could give would be greatly appreciated.      Thank you

Submitted by Bruce Steiner on Sun, 2016-03-27 01:08

  • If an IRA is payable to the IRA owner’s estate, (i) if the IRA owner was past his/her required beginning date, it has to be paid over his/her life expectancy as of his/her death (as if he/she hadn’t died), or (ii) if the IRA owner died before his/her required beginning date, then by the end of the 5th calendar year after death.
  • Why would anyone create such a complicated plan, leaving the IRA to his/her estate, then having the estate be payable to a trust, and then having the trust immediately end and pay out to the ichildren (in the first case) or the nephews (in the second case)?  All the IRA owner had to do was name the children or nephews (or separate trusts for their benefit) as the beneficiaries of his/her IRA.  Not only would that have been much simpler, it would have allowed the beneficiaries to stretch the IRA out over their life expectancies (or, if it were payable to trusts, over the life expectancy of the oldest beneficiary, most likely the oldest child or the oldest nephew). 

Submitted by Ben Meyer on Sun, 2016-03-27 16:50

  • Bruce, the link in your posting generates an error screen, due to the inclusion of the final period in the link.  If the final period is manually deleted from the error screen, the link will then work fine.  –UPDATE: The link is now fixed.
  • Also, the failure of the proposed technique of estate beneficiary to pourover will, then to trust, can be adduced from the languarge of TR 1.401(a)(9)-4, Q&A-5.  The clear language of the regulation requires the IRA beneficiary designation to name the trust.  It makes no provision for the indirect chain of references that were proposed in the posted inquiry.  Q-5 begins with the condition “[i]f a trust is named as a beneficiary of an employee…”.  A-5 includes similar wording as “[i]f the requirements of paragraph (b) of this A-5 are met with respect to a trust that is named as the beneficiary..”.  There is no provision for the estate to be named as a beneficiary, followed by estate distribution via a pourover will, followed by distribution to trust beneficiaries.  Perhaps a PLR might be requested to test the waters for such a circuitous technique, if the value in question is large enough to justify the cost of a PLR.

Submitted by Bruce Steiner on Sun, 2016-03-27 20:28

  • Thanks for letting me know to fix the link to my article.  
  • The preamble to the 2002 final regulations makes it clear that the IRS considered and rejected allowing you to look through an estate to the beneficiaries of the estate.  I tried to post a link to it but my post was blocked.  You can find it by searching “preamble to 401(a)(9) regulations” (without the quote marks), pulling up the pdf Federal Register document captioned “Department of the Treasury – GPO,” and looking at page 18990 (which is the 4th page of the pdf document).
  • In both examples, leaving the IRA to the estate, creating a separate trust, having the estate pay to the trust, and having the trust immediately terminate, created unnecessary cost and complexity and destroyed the stretch.  The IRA owner could have simply left the IRA to (or to separate trusts for) his/her children or nephews.

Submitted by Ben Meyer on Mon, 2016-03-28 04:50

The referenced issue of the Federal Register contains some very good information that shows the IRS’s view on several aspects of distributions and designated beneficiaries.  (Thanks to Bruce Steiner.)  I tracked down the direct link for retrieval, which is:   http://www.gpo.gov/fdsys/pkg/FR-2002-04-17/pdf/02-8963.pdf  

Submitted by Elizabeth Herp on Tue, 2016-03-29 22:53

Your replies are extremely helpful though they do confirm my concerns.  I don’t know why the decedent set it up this way, I’m just glad it wasn’t our firm that helped him do it.  I suspect that naming the estate as IRA beneficiary was an oversight rather than an intentional part of the plan. Do you know the approximate cost of obtaining a PLR?  The IRA is valued at $78k.  Again, thank you so much for this thoughtful and helpful information.Elizabeth

Submitted by Alan - IRA critic on Wed, 2016-03-30 00:26

PLR cost under recent user fee schedule apparently 10k, and legal fees would roughly be at least another 6k. 16k to persue a highly unlikely exception to the current non individual beneficiary RMD  Regs on a 78k account value is not money well spent.https://irahelp.com/slottreport/more-upcoming-ira-private-letter-ruling-fee-increases

Submitted by Elizabeth Herp on Wed, 2016-03-30 18:09

Thanks again Bruce, Benn, Alan. You guys certainly know your stuff. Most helpful.

Submitted by Iver Cooper on Sun, 2024-12-29 17:48

I can imagine a couple of related situations in which this would come up without the estate being named as a beneficiary of the IRA.

Case #1: Perhaps because of the SECURE ACT, a person with a living trust decides not to name the trust as secondary beneficiary of an IRA, but just names individuals. If those individuals predecease the IRA owner, then when the IRA owner dies, the IRA goes into the estate. Now suppose that the IRA owner had a pour-over provision in their will. Then the IRA assets will go into the trust.

Case #2: Person A has an IRA account, and names various people as primary and secondary beneficiaries. They all predecease A and A’s will names B as an heir. B also predeceases A and has a trust and a will with a pourover provision.

In these scenarios, you could say that the IRA owner should have changed the beneficiary designations when the beneficiaries passed away, but I imagine that the owner and the named beneficiaries (and heirs) were all members of the same family and died essentially simultaneously in a car crash, plane crash, cruise ship sinking, house fire, etc.

It seems to me that in both those situations, the result would be that the trust gets the IRA but does not qualify as a see-through trust and hence the 5-year rule applies.

Agree? Disagree? Comments?

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