Which Trust Beneficiaries Determine Distribution Rule?
Suppose an IRA designates a Trust as a contingent beneficiary. The participant dies and the primary beneficiary predeceased the participant, so the IRA passes to the Trust. Now we need to determine if the trust is see-through and what distribution rule applies.
Will IRS look only at the then current beneficiaries of the trust (which is what I would think would be the case) or would it also look at the Trust’s contingent beneficiaries? It is not unusual for the if-everyone-else-is-dead beneficiaries to be charities so the assets don’t pass to the State.
And if it only looks at the current beneficiaries, what happens if the IRA continues to be held in trust and all the individual beneficiaries die, so that the charity becomes the current beneficiary?
Permalink Submitted by Alan - IRA critic on Sat, 2025-01-04 11:51
In this situation, having a charity included as an accumulation trust beneficiary will result in the trust not being qualified for look through as before because the charity will be a countable beneficiary that has no life expectancy.
There are some exceptions to the above. First, a conduit trust is not subject to the above rule, neither is a trust that has another living human residual beneficiary that would inherit after the trust primary beneficiaries, which results in the charity being “third in line”. The other exception is an SNT (supplemental needs trusts).
Without meeting one of these exceptions, the charity is countable and disqualifies the trust. In that case, the 5 year rule applies if the IRA owner passes prior to RBD, and the remaining LE of the owner applies if they pass on or after their RBD. If the charity instead was “non countable” the 10 year rule would apply with annual beneficiary RMDs based on the oldest of the individual trust beneficiaries.
Permalink Submitted by Iver Cooper on Sat, 2025-01-04 17:17
In the case I am thinking of, the charity is no better than third-in-line. (The first tier are the grantors’ children, the second tier are collateral relatives spanning three generations.) So it would appear that the charity is not countable if, at the time the IRA passes into the trust, there are living beneficiaries in both the preceding tiers.
Where would I find in the IRS regulations the “third-in-line” exception?
If I understand you and the rules correctly, if the trust agreement required withdrawal of the RMDs (which it presumably would distribute to the current beneficiaries), it would qualify as conduit trust and thus it would not matter if a charity is second-in-line, at least until the current beneficiaries died and the charity became the current beneficiary.
In view of your comment that a conduit trust is not disqualified, I find it odd that I have seen trust documents that established a conduit trust and specifically provided that a non-individual beneficiary such as a charity could not be a beneficiary of the conduit trust.
Permalink Submitted by Alan - IRA critic on Sun, 2025-01-05 18:40
The new Regs applicable to trusts are under 1.401(a)(9)-4 of the final Secure Act Regs. The following is copied from those Regs:
“(ii) Certain trust beneficiaries disregarded —(A) Entitlement conditioned on death of beneficiary. Any beneficiary of an accumulation trust who could receive amounts from the trust representing the employee’s interest in the plan solely because of the death of another beneficiary described in paragraph (f)(3)(i)(B) of this section is not treated as having been designated as a beneficiary of the employee under the plan.”
If a beneficiary is disregarded, they are not “countable” in determining whether the trust is qualified or not. In your example, the charity could not inherit until after the death of these residual beneficiaries, but you need to be sure that they are actually residual beneficiaries of the trust and not primary beneficiaries.
Likewise, for a conduit trust, only the conduit beneficiary counts, so no other residual beneficiaries have to pass in order to have the charity disregarded.