Stretching an Ira after RMD’s have been taken and paid tax on for a trust.
IRA owner died in 2016. Beneficiary of his IRA was his trust. He was only 60 years old. No RMD’s were taken until 2020. 2017, 2018, 2019 and 2020 RMD’s were taken in 2020. Trust is paying tax on them. Can the IRA still use the look through rule to stretch the IRA and create 4 beneficiary IRA’s for each of the 4 beneficiaries or the trust using the oldest beneficiary’s life??
Permalink Submitted by Alan - IRA critic on Fri, 2021-03-26 19:56
The trust either qualified for look through in 2017 or it didn’t. If it failed qualification, the 5 year rule applies and the IRA must be distributed by 12/31/2022 (2020 does not count due to waiver). If the trust did qualify, then the RMD to the trust or to separate inherited IRAs assigned by the trustee if they have authority, will be based on the oldest of the trust beneficiaries including any remainder beneficiaries. Note that the 2020 RMDs were waived, so there was no need for a 2020 RMD distribution, but the late distribution of 2017-2019 RMDs will result in the excess accumulation penalty unless a Form 5329 is filed for each year 2017-2019 requesting the penalty be waived for reasonable cause and stating that all late RMDs have been distributed. If trust is qualified, LE RMDs can resume in 2021.
Permalink Submitted by William Schorr on Sun, 2021-03-28 18:18
Thanks for the info. One quick follow up question. The trust did qualify for look through in 2017, but didn’t do it. It has taken the RMD’s itself and paid tax on all the late RMD’s and requested wavier of the 10 percent penalty. For 2021 and forward can it now do the look through to the 4 beneficiaries of trust, even the trust took the RMD’s for 2017, 2018 and 2019. Another words do you have to start the look through in the year after death, or can you have the trust take RMD’s for a while and then switch to the look through at some later time.
Permalink Submitted by Alan - IRA critic on Sun, 2021-03-28 18:57
As long as the trust qualified for look through initially, it remains qualified even though RMDs were missed. The only question is whether the IRS waives the 50% penalty, and they typically do with a properly filed 5329 and late RMDs made up. Therefore, the trust can now just continue the RMDs in the usual manner.
Permalink Submitted by Bruce Steiner on Sun, 2021-03-28 20:03
What do you mean by “his trust?” The IRA owner couldn’t be a beneficiary of a trust after his death. He could leave his IRA in trust for other beneficiaries, but not in trust for himself.