Another IRA / Trust Question
Revocable living trust is the beneficiary of a single IRA.
Trust provides that upon death of settlor, $x goes to wife outright, $y goes to adult child one outright, and $z goes adult child two outright. The balance is further subdivided into further trusts for children and their descendants.
Let’s say the only asset is the IRA.
1) How does this work? Do child 1 and child 2 have to use wife’s age to calculate their RMDs? Is there a rule about doing a trustee to trustee transfer by a certain date that makes this work better?
2) Is the satisfying the pecuniary bequest to the beneficiaries with the IRA a trigger of Keenan gain?
Permalink Submitted by Al Fry on Mon, 2007-09-03 22:51
If the IRA owner wants part of the IRA to go to spouse and kids outright, then the trust should not be named bene of that portion. Depending on the terms of the trust, the kids may not get anything until the spouse dies, if the trust is the bene.
Permalink Submitted by Alan Spross on Tue, 2007-09-04 20:07
#2) The Kenan gain issue is one of those rulings that have not been followed up with much definition. However, I think it best to avoid pecuniary bequests because they open up this pitfall. Since this is a done deal here, I think the answer is “the risk is there for Kenan to surface.” In most such cases to date, this issue has probably been glossed over both by preparers and the IRS. Not to reassuring an answer, perhaps Bruce Steiner can embellish it.
Permalink Submitted by David Shulman on Tue, 2007-09-04 21:58
The Trust provides that the distributions of the pecuniary amounts go outright, and are not held in trust.
So I think that both spouse and childred will get it right away.
However, if we do it through the trust, and there are multiple beneficiaries, does that prevent spouse from being able to roll over? Do the kids have to use spouses life expectancy for their rmds?
Permalink Submitted by Al Fry on Wed, 2007-09-05 02:35
My answers would be yes, and yes.
Permalink Submitted by Bruce Steiner on Wed, 2007-09-05 03:27
It’s not clear if this situation involves a living IRA owner or a deceased IRA owner.
If it involves a living IRA owner, there’s no point to trying to solve these problems. The IRA owner can revise the beneficiary designation to avoid them.
If it involves a deceased IRA owner, the interested parties should consult with competent tax/estates counsel to consider what to do.
There has been some discussion as to whether the use of the IRA to satisfy the pecuniary bequests to the children accelerates the income. In Chief Counsel’s Memorandum 200644020, the IRS recently took the position in a similar situation that it would.
As to the spouse, some older private letter rulings allow the rollover without accelerating the income. PLRs 9808043, 9623056 and 9608036. We don’t know whether the IRS would still rule the same way in the case of a spouse (in other words, whether the IRS would apply the rationale of CCM 200644020, or whether the IRS would treat a spouse differently for this purpose).
If this involved a deceased IRA owner, is there a way to fund the bequests to the children without having to use the IRA?
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by David Shulman on Wed, 2007-09-05 08:43
They’re still living.
Can the IRA owner make dollar figure beneficiary designations, and then make a designation for the balance?