Inherited IRA

Submitted by David Pratt on Wed, 2019-11-20 20:53

An individual with a Rollover IRA designated her revocable Trust as beneficiary. Upon her death, this IRA account was transferred into an Inherited IRA with the trust as the Inheritor; so the registration is Ms. X Trust Agreement, Beneficiary of Ms. X IRA. Now the 3 beneficiaries of the Trust are interested in taking direct control of their respective shares of this account. They would all like to take them as inherited IRAs. They are not named beneficiaries of the trust Agreement, but rather are identified by class, to wit: all living children of Ms. X.

My question: This feels like a secondary inheritor and I wonder if their goal can actually be accomplished. The investment firm is pushing back a bit – they’ll do it, but suggest that it isn’t really doable under IRS Regulations. Does anyone has some insights on this unusual (in my experience) situation? Thank you.



Submitted by Alan - IRA critic on Wed, 2019-11-20 23:19

  • This situation is not that unusual.  Per IRS Reg 1.401(a)(9)-4, QA 5, the rule that a designated beneficiary need not be listed by name if they are identifiable members of a class (living children) also applies to trusts. However, the trust must itself meet the 4 stated requirements to be a qualified trust for look through purposes to allow the trust beneficiaries to be considered designated beneficiaries. However, the separate account rules (for RMD calculation) do not apply to trusts, therefore if the trust is qualified for look through, the RMD will be based on the oldest individual living child.
  • The trust provisions determine if the trustee can assign the trust assets (inherited IRA) out of the trust to the individual trust beneficiaries. If the trustee has this power, then an inherited IRA can be created for each trust beneficiary, but the RMD will remain based on the oldest of the living children.
  • If the trust is not qualified for look through, then the assignment to inherited IRAs can still be made, but the RMDs will be restricted to either the 5 year rule if the IRA owner passed prior to the RBD, or the decedent’s remaining life expectancy for deaths after the RBD.
  • The ability of the trustee (or estate executor) to assign the inherited IRA to beneficiaries has been established through several private letter rulings over the years. This should not be an issue for the custodian.

Submitted by David Pratt on Thu, 2019-11-21 13:44

Thank you so much!  This is tremendously helpful.

Submitted by Ken Fitzgerald on Thu, 2019-11-21 17:00

Hi Alan,  Your expertise is amazing, and I always read the posts here to gain more knowledge for my own use.  I was wondering if in the above situation, the oldest living, on whom the “joint or shared” RMD calcs are done, would actually change to the calcs of the next oldest, if that oldest child beneficiary passed away after their age had been used.  It seems like it would, but I wasn’t sure if that is fixed with age of oldest living at time of Trust receiving the IRA, or could change later.   Thanks for all your help to everyone!       

Submitted by Alan - IRA critic on Thu, 2019-11-21 17:49

  • Cape, for a look through trust, the same rules generally apply as they would to individuals named without a trust. If the oldest individual trust beneficiary passes after the owner, their age continues to be used by the others even if that child passed before any RMDs have actually been distributed. This is true even if that child passes prior to the beneficiary determination date (9/30 of the year following the year of death).
  • However, if that oldest child did not pass but rather either disclaimed their interest OR their interest was fully paid prior to that 9/30 date, then the age of that child would be disregarded and the next oldest child’s age would apply. Therefore, death of the beneficiary is treated differently than either disclaimers or full distributions of the interest of that beneficiary. After 9/30, the disclaimer and full payment options disappear, so no events can change the established life expectancy after that date.

Submitted by Will Snodgrass on Wed, 2019-12-11 19:07

When Ed Slott (and IRS Publication 590-B, pg 12) say “The separate account rules can’t be used by the beneficiaries of a trust”, does that simply mean I can split the inherited IRA into separate accounts for each beneficiary – but all those separate beneficiary accounts have to use the birth year of the oldest beneficiary for RMD calculations? Here is some additional background…The first brokerage firm I talked to would not split an inherited ROTH IRA (with a trust as the beneficiary) saying “they want to protect their clients from IRS penalties”.  The second brokerage firm said they will split an inherited ROTH IRA (with a trust as the benificiary) as long as the trustee (me) certified the trust is a look through trust.  The trust is a look through conduit type trust.Thanks!

Submitted by Will Snodgrass on Wed, 2019-12-11 19:07

When Ed Slott (and IRS Publication 590-B, pg 12) say “The separate account rules can’t be used by the beneficiaries of a trust”, does that simply mean I can split the inherited IRA into separate accounts for each beneficiary – but all those separate beneficiary accounts have to use the birth year of the oldest beneficiary for RMD calculations? Here is some additional background…The first brokerage firm I talked to would not split an inherited ROTH IRA (with a trust as the beneficiary) saying “they want to protect their clients from IRS penalties”.  The second brokerage firm said they will split an inherited ROTH IRA (with a trust as the benificiary) as long as the trustee (me) certified the trust is a look through trust.  The trust is a look through conduit type trust.Thanks!

Submitted by Alan - IRA critic on Wed, 2019-12-11 19:52

  • Because a Roth IRA has no RMDs, there is no required beginning date and the owner will therefore pass PRIOR to the RBD. If the trust does not qualify for look through treatment the result is the 5 year rule will apply. Perhaps that is what the first firm was referring to. However, part of trust qualification is submitting the trust info to the custodian by 10/31 of the following year as well as certifying that is meets the other requirements for look through.  Beyond the qualification issue, the trustee of the trust and the trust provisions must allow for distribution of the IRA out of the trust to separate accounts. 
  • Therefore, if the trustee can transfer the inherited Roth out of the trust into separate accounts for each trust beneficiary AND the trust is qualified, these beneficiaries will be able to take beneficiary RMDs based on the oldest trust beneficiary. They can have their separate accounts, but that does not change the RMD. They cannot each use their own age, only the age of the oldest.
  • If the trust is also a conduit trust, that means that any remainder beneficiaries can be ignored in determining who is the oldest beneficiary. The oldest will be the oldest of the conduit distributions being made.

Submitted by Will Snodgrass on Wed, 2019-12-11 23:24

Thanks Alan.  You confirmed I am on the right track, I really appreciate your help.

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