Sub-divide IRA

Submitted by Zab ghundik on Tue, 2019-03-19 23:43

Decedent died at age 89 in January ’17. Decedent had IRA with no beneficiary. His IRA because subject to probate. His Will was a pour over will to his Trust. Now, the IRA is an asset of the Trust.

IRA has a non-individual beneficiary. RMDs continue to be calculated based on decedent’s single life expectancy. The Trustee decides when to take the RMD, it becomes payable to the Trust, then the Trustee pays out to the three beneficiaries (1/3 each). Trustee does not want to do this for another 10+ years.

The three beneficiaries have differing financial and tax planning objectives. Extending the trust for the entirety of the life expectancy is not aligned with the beneficiaries’ needs and wants.

What does the law/IRS say about subdividing the IRA account? The custodian would retain the account and open 3 separate accounts so the IRA funds would never be given to the beneficiaries creating a taxable event. The thought was to get a court order to split the account into 3 equal shares so that each of the beneficiaries can decide when to take and RMD, what the investment strategy of the funds will be and really have the control over the account. The IRA would still be calculated based on the decedent’s life expectancy. The goal is really to allow the three beneficiaries to do what they want with their portion of the account, based on their own financial & tax needs.



Submitted by Alan - IRA critic on Wed, 2019-03-20 00:11

The trust provisions determine if the assets can be distributed out of the trust to the trust beneficiaries. If the trust allows this or allows the trustee the discretion to assign the IRA, then some custodians will consent to the assignment and others will resist and want the trustee to obtain a specific PLR, which currently costs nearly 20k. Sometimes the trustee of the trust can locate a new custodian that will accept assignment and would transfer the IRA to the new custodian. But to start with, the trust provisions must allow assignment. And even with assignment, the IRA must be completely distributed by 2022, so there is only a 4 year stretch remaining from here.

Submitted by Zab ghundik on Wed, 2019-03-20 17:55

The trust allows for distribution. There are no restrictions based on the trust terms. The trust also allows for assignment.  The custodian is not requiring a PLR.  What we are wondering is: (1) is subdividing an IRA allowable under IRC? (2) does the potential division change the way the IRA is distributed? You indicate a 5 year pay out, but decedent died after age 70.5, so doesn’t that mean the account is distributed per his life expectancy? I thought if we divide the account into 3, then the RMDs would still be calculated based on decedent’s life expectancy.

Submitted by Alan - IRA critic on Wed, 2019-03-20 22:21

There are several references to separate account creation in the RMD rules. Reg 1.401(a)(9)-8 describes the separate account rules. That said, the separate account rules for RMD purposes do not apply to the RMDs of trust beneficiaries but the inherited IRA can still be assigned to the beneficiaries per various PLRs, without changing the RMD. When I mentioned a 4 year stretch, that is based on the estimated remaining life expectancy of the decedent since you indicated that the IRA did not name a beneficiary. For death after the RBD with the IRA left to the estate, the IRA must be distributed over the remaining life expectancy of the deceased owner. Note: I believe that if the IRA had named “trust named in my will” as beneficiary, then if the trust was qualified, the RMD distribution period would have been based on the oldest trust beneficiary. But apparently, the IRA agreement did not so specify.

Submitted by Zab ghundik on Wed, 2019-03-20 22:51

This is making no sense to me.  My background is trust/estates, not IRAs, so please forgive me.  Let me start over:Decedent had IRA. He died at age 88 and had been taking his RMDs.  He dies, no beneficiaries on IRA.  IRA went through probate, his will was a pour over will, stating that the beneficiary is his trust.  My understanding is that the IRA becomes an asset of the trust, not payable on death to the trust. The trust contains mediocre qualified retirement account language. The beneficiaries get 1/3 each, outright and free of trust.Now the beneficiaries want their share of the IRA in the most tax efficient manner, but they cannot agree on anything.Assuming the IRA was a trust asset, the trustee has been withdrawing the RMDs, which have been calculated based on decedent’s age and remaining life expectancy. The Trustee has then deposited said RMD to the Trust account, then from the trust account, distributing 1/3 shares to each beneficiary.Now, the beneficiaries want to change this so they can each have their “own” IRA. My understanding was that we can divide the IRA into 3 sub-accounts, one for each beneficiary (under 1.401(a)(9)-8). The sub-account would pay RMDs to the beneficiary, based on the life expectancy of the owner, which I believe is about 12 years.  RMDs are not calculated on the beneficiary’s age.Are you indicating that the trust beneficaries can actually open inherited IRA accounts? My understanding is that it is too late, and the account is an asset of the trust.Sorry…just so thouroughly confused on this.  I’m just trying to figure out what to do.

Submitted by Alan - IRA critic on Wed, 2019-03-20 23:25

  • “Separate accounts for purposes other than ADP. Although Reg. § 1.401(a)(9)-4, A-5(c),states that separate accounts cannot be established for any purpose of the minimumdistribution rules for benefits that are left to multiple beneficiaries through a single fundingtrust, PLRs make clear that in fact the IRS means such separate accounts CAN be established for all RMD purposes other than determining the ADP. Thus, for example, if an IRA is payable to a trust that is to terminate immediately upon the participant’s death and be distributed outright to the decedent’s three children, the trust can divide the IRA into separate inherited IRAs and transfer one such separate inherited IRA to each of the children. Thereafter, the children’s respective separate inherited IRAs (or “sub-IRAs” as the IRS calls them in some PLRs) will be treated as “separate accounts” for all minimum distribution purposes except determination of the ADP.”
  • The above was copied from an article by renowned retirement plan authority Natalie Choate. I think this is what you were concerned with – irrespective of no change to the RMD ADP (applicable distribution period), whether the trustee has the authority to assign the inherited IRA directly to the trust beneficiaries. Several PLRs indicate this can be done, and your IRA custodian appears ready to cooperate with the trustee. The trust beneficiaries can open the inherited IRAs, but it is the trustee that must present the transfer request to the IRA custodian.

Submitted by Zab ghundik on Thu, 2019-03-21 21:18

Is this IRA a trust asset or is it payable on death?For typical probate matters, after going through the process it becomes an asset of the trust (assumin pour over will).  But for an IRA going through probate, does it make the trust a beneficiary?  If I can figure out this categorization, I think I’ll understand this better.

Submitted by Alan - IRA critic on Thu, 2019-03-21 23:07

The IRA would temporarily be an asset of the estate until poured into the trust, subject to possible jurisdictional variations. The trust then becomes the beneficiary of the IRA, but the trust beneficiaries  eventually becomes the beneficiaries of the IRA if and when the trustee distributes the IRA out of the trust to the trust beneficiaries.

Submitted by Zab ghundik on Thu, 2019-03-21 23:36

Is there a section of the IRS code stating that the trust becomes beneficiary of the IRA?  If this was any other account that was probated, it would remain a trust asset and distributed per the terms of the trust.  What law says that when it comes to an IRA under this scenario, the trust becomes a beneficiary? 

Submitted by Alan - IRA critic on Thu, 2019-03-21 23:51

Are you asking about being a beneficiary for RMD purposes, or just being a beneficiary in the sense that the trustee of the trust will be able to take distributions or provide data to the IRA custodian such as a request to distribute the IRA out of the trust to the trust beneficiaries?

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