Termination of Trust – IRA RMD going forward

Submitted by Barry Sacks on Tue, 2018-01-16 20:15

We have a trust that will terminate this year. The trust has, as beneficiaries, the widow of the trustor and the children of the trustor (who are all adults). The trustor died late last year. He named the trust as the beneficiary of his IRAs. There is also some cash held by the trust. The trust provisions are such that the trust will continue for the life of the widow, and will pay out the cash for her care during her life, but if she dies before all the cash has been paid out, the remaining amount, if any, will be paid the to trustor’s children. A small portion of one of the IRAs will also be drawn by the trust to add to the total cash, to make up the pecuniary amount specified by the trust to be paid for the care of the widow. The residue, which consists of the IRAs (net of the amount drawn to bring the total cash up to the pecuniary amount for the widow) , will be transferred immediately to the children, before any distributions to the children are made. Because the decedent-trustor had received his RMD for 2017 before he died, there is no RMD to be paid to the estate of the decedent. In effect, the trust will terminate with regard to the children. The widow is only entitled to the cash, and not to the IRAs. The question is whether, under these circumstances, the widow’s age is to be taken into account in determining the RMDs from the IRAs to the children, going forward.

Incidentally, if relevant, the trustee has not yet re-titled the IRAs to the name of the trust. He is considering spinning off a separate trust to hold the cash for the benefit of the widow, and only after completing the spinoff re-titlng the IRAs (or at least the IRAs other than the one from which the extra cash is drawn to complete the pecuniary amount for the widow).

Thanks for any information you can provide.
Barry H. Sacks



Submitted by Alan - IRA critic on Wed, 2018-01-17 01:51

Barry, this is a real brain buster, at least for me. Hopefully, Bruce Steiner, an estate attorney will see this and comment. What is unique here is that the IRA itself will be removed from the trust before the beneficiary determination date of 9/30, leaving the IRA with NO named beneficiary. I think this has the same result as if the trust had been terminated by that date, even though we know it wasn’t. With the IRA assigned to the children before that date, if there is NO beneficiary as a result, the applicable RMD distribution period would be the remaining life expectancy of the decedent, which might be roughly comparable to the remaining life expectancy of widow. That would leave the children with either an inherited IRA or separate inherited IRA accounts under which each child would have to take RMDs using the decedent’s life expectancy. It should not matter when the IRAs are retitled or if the trust is split into a subtrust. 

Submitted by Barry Sacks on Wed, 2018-01-17 05:18

Thank you very much, Alan.  I appreciate your comment, and I agree totally.  To solve the problem you point out, that of not having a designated beneficiary at September 30th, consider the following scenario:  Suppose that the trustee spins off the separate trust for the widow before September 30th of this year, but does NOT distribute the IRAs until AFTER September 30th.  Then, would the only designated beneficiaries be the three children, and the oldest of them would be the measuring life for the IRA distributions for all of the IRAs?

Submitted by Bruce Steiner on Wed, 2018-01-17 14:43

  • Alan:  thanks for the kind words.  The IRS takes the position that using an IRA to fund a pecuniary bequest will accelerate the income.  Is there another solution?
  • Bruce Steiner

Submitted by Pamela Fedowich on Wed, 2022-12-14 17:55

Hi all.  I know this is an old post. However, I’m trying to allow separate accounts to be made to 5 beneficiaries, where one of the beneficiaries, the s. spouse, has a pecuniary amount of 200,000.  Then, the remainder is split among 4 children.  I keep seeing that a pecuniary bequest won’t qualify for separate accounting, and Bruce, you say it above, and in an article you wrote, but yet, I cannot find where this rule is from?  I only see secondary sources and discussion about it.  Bruce (I love your work, by the way) you stated two older PLRs in one of your articles where a pecuniary bypass to a spouse rollover was not discussed by the IRS.  I feel that 1.401(a)(9)-8 doesn’t distinquish between types of asset (percentag vs. pecuniary).  See : Q-. 3. . What are separate accounts for purposes of section 401(a)(9)?A- 3 . For purposes of section 401(a)(9), separate accounts in an employee’s account are separate portions of an employee’s benefit reflecting the separate interests of the employee’s beneficiaries under the plan as of the date of the employee’s death for which separate accounting is maintained. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures, for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the separate accounts (emphasis added). However, once the separate accounts are actually established, the separate accounting can provide for separate investments for each separate account under which gains and losses from the investment of the account are only allocated to that account, or investment gain or losses can continue to be allocated among the separate accounts on a pro rata basis. A separate accounting must allocate any post-death distribution to the separate account of the beneficiary receiving that distribution.” My interpretation of this language is that as long as losses and gains and anything else regarding shares are calculated “on a pro rata basis in a reasonable and consistent manner” prior to the establishment of the accounts, it should not matter that one person has a pecuniary dollar amount and one does not. The pecuniary nature of the “amount” does, in fact, take into consideration gains and losses.  It doens’t doesn’t include them.  Thoughts???  

Submitted by Bruce Steiner on Sun, 2023-01-01 20:52

  • Pamela:  a fractional share (such as 50% to A and 50% to B) shares in income and gains.  But a pecuniary amount (such as $100,000 to A and the rest to B) doesn’t.  Depending on state law, A may get interest, or in the case of a pecuniary bequest in trust, A may share in the income, but A doesn’t share in the gains.

 

  • Bruce Steiner

Submitted by Barry Sacks on Wed, 2018-01-17 15:17

Thank you Bruce and Alan.  Yes, I agree that an IRA used to satisfy a pecuniary bequest is taxable. But in this situation, the piece of one of the IRAs needed to add to the cash to bring the total up to the pecuniary amount is small. The other IRAs are substantial, as is the remainder of the IRA from which the pecuniary piece will have been taken. So my question remains about the RMDs of the IRAs, assuming that they are distributed AFTER Sept 30th.  Thanks again, and thanks in advance, for your help..          Barry

Submitted by David Mertz on Wed, 2018-01-17 18:00

It seems to me that with the trust being required to take a distribution from an IRA to be able to satisfy the pecuniary bequest means that the beneficiaries of the trust would not be entirely identifiable from the trust instrument because it cannot be known from the trust instrument whether a distribution from an IRA to the trust would be necessary to satisfy the pecuniary bequest.  If this is correct, this would mean that the IRAs have no designated beneficiary for the purpose of determining RMDs and that the 5-year rule would apply if the deceased had not reached his RBD for RMDs (dying in the year he reached age 70½ since he did take an RMD for 2017) or the deceased’s age if he had reached his RBD.

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