Revocable Trust as beneficiary of TSA
Client passed after required beginning date. Revocable Trust is beneficiary of his Tax Sheltered Annuity (TSA). His trust names his 3 adult children as equal beneficiaries to be paid out in a lump sum. The trust qualifies as a designated beneficiary. I understand the TSA options for payout as follows:
1. Lump sum, or
2. RMD’s must begin by 12/31 of the year following owner’s death and be based on the longer of:
a) The life expectancy of the oldest trust beneficiary, reduced by one each year.
OR-
b) The remaining single life expectancy of the IRA owner, reduced by one each year.
Please confirm my understanding, thank you.
Steve
Permalink Submitted by Alan - IRA critic on Tue, 2017-03-28 00:04
Permalink Submitted by Steven Finkelstein on Tue, 2017-03-28 17:26
Thank you for your reply. Turns out that that annuity company’s policy only allows for two options: lump sum or systematic distributions over a period not longer than the deceased owner’s non-recalculated single life expectancy (i.e. single life table, reduce by one). They won’t allow distributions over the oldest trust benef’s life expectancy. The trust allows a rollover of the TSA to an Inherited IRA which we plan on doing. The cmv of the annuity is $100k, of which get’s split equally among 3 adult trust benef’s, so we are not talking hugh tax consequences. The single life table says the 90 year old decedent has a life expect of around 5 years so 1/5 of the account will have to be distributed to the trust starting the year following death (2018 in this case), reduced by one each year thereafter until the account is empty. Does this makes sense? Thank youSteve
Permalink Submitted by Alan - IRA critic on Tue, 2017-03-28 18:14
Sounds like the TSA plan wants to avoid reviewing trusts and determining whether trusts are qualified for look through, thus the restriction to decedent’s remaining LE. Now, a new question arises and I am not sure of the answer. While the trust provisions qualify it for look through treatment and the oldest trust beneficiary is treated as a designated beneficiary, the TSP provisions do not allow the plan to treat the trust as qualified even though the trust IS qualified. That may or may not mean that a transfer to inherited IRA in permissible because it is not permissible for trusts that are not “qualified”. The IRS Regs indicate that the trust information must be submitted to the plan, it does not specify that the plan must treat the trust as qualified. Was the trust info submitted, and how did the plan respond? Did they just indicate that the trust was not applicable to their plan? Has the plan been asked by the trustee to do a direct rollover to inherited IRAs?
Permalink Submitted by Steven Finkelstein on Wed, 2017-03-29 20:03
Thank you for your reply. You raise an interesting question. The ttee has not and will not request anything unless I advise them to do so. I am essentially quaterbacking the project. As an FYI, the “plan” is a variable annuity with Ameritas and I think was a rollover from an employer sponsered plan years ago. Not sure why it wasn’t rolled over to an IRA at the time. Yikes! I have spoken to Ameritas and they will do what we instruct them to do within the confines of their plan document which, as I said earlier, allows lump sum (of course) or installments over decendents remaining LE (i.e. mini stretch). I asked them if, the ttee wants to do the stretch, how to make that happen. They said, must set up an Inherited IRA and they didn’t question that the TSP may not be eligible to do that while treating the trust as a designated benef. I brought your concern up to them and they now want me to email them with my concern so they can ring up the ladder to legal. I may do that. Yes, we will send the trust document to the plan with the paperwork to request the payout option. The simpliest strategy at this point would be to take the lump sum which would represent about $30k of taxable income to each of the 3 benes. In retrospect, the mistake I made is that I didn’t get the TSA into an IRA AND should have avoided naming the trust as benef and instead simply named the 3 adult children. I knew better, just didn’t get ahead of that. If you have any additional words of wisdom, appreciate them. Thank you!Steve
Permalink Submitted by Alan - IRA critic on Wed, 2017-03-29 23:44
If the TSA administrator is willing to transfer the plan balance into inherited IRAs, I think that should indicate that the plan agrees that the trust is qualified for look through, but plan provisions restrict the RMD distribution period as allowed. That restriction should not extend to the portability options under Sec 402(c)(11) for qualified trusts. Note that when these direct rollovers for non spouse beneficiaries were included in the PPA Sec 829, one of the main purposes was to allow the beneficiary to avoid plan 5 year rule requirements. The situation here is analagous to that situation, since a direct rollover to inherited IRAs will allow a stretch based on the age of the oldest trust beneficiary. Finally, the IRS Regs outlining the 4 requirements for a qualified trust only require submission of the trust info to the plan administrator. Nowhere does it suggest that the plan provisions alter the nature of the trust itself from qualified to non qualified. Therefore, if the plan is willing to transfer the balance to inherited IRAs I think you should proceed.