Trust benificiary finalization date
Owner of 401k dies in 2006. Leaves all of 401k to trust. Beneficiaries are three kids. One kid is 40, the others 18 (twins). The 40 year old tkaes distribution of her full percentage prior to Sept. 30 2007, and rolls it into her own IRA,
RMD is no longer based on 40 year old, correct?
Basically, the trust beneficiary finalization date allows you to pick and choose trust beneficiaries even after death.
Seems odd to me…is this correct? If so, how come everyone in this board always talks about RMDs having to be based on oldest beneficiary of trust? This is the “out”, no?
Permalink Submitted by Alan Spross on Sun, 2007-09-09 06:35
The RMD would still be based on the 40 year old because separate account rules do not apply to trust beneficiaries.
To eliminate the 40 year old from RMD calculation, that person would need to process a qualified disclaimer under Sec 2518, or (and this second option is less clear) perhaps take a full taxable distribution as might be expected for a charitable beneficiary. I am guessing here, but the full taxable distribution would probably have to include all of the 40 year old’s interests in the trust including the IRA, so that the presumed qualified trust no longer included that beneficiary as of 9/30 of the year following death.
Again, the basic reason your example would not work is because all the 40 year old did was create a separate inherited IRA account. Moreover, under IRS Notice 2007-7, the non spouse IRA transfer that occurs when a trust is the beneficiary is titled to the “trust as beneficiary of the plan”. It is not titled to an individual trust beneficiary as would be the case for a non trust designated beneficiary. Attached is a paste of that question in Notice 2007-7:
“”””Q-16. If the named beneficiary of a decedent is a trust, is a plan permitted to make a direct rollover to an IRA established with the trust as beneficiary?
A-16. Yes. A plan may make a direct rollover to an IRA on behalf of a trust where the trust is the named beneficiary of a decedent, provided the beneficiaries of the trust meet the requirements to be designated beneficiaries within the meaning of § 401(a)(9)(E). The IRA must be established in accordance with the rules in Q&A-13 of this notice, with the trust identified as the beneficiary. In such a case, the beneficiaries of the trust are treated as having been designated as beneficiaries of the decedent for purposes of determining the distribution period under § 401(a)(9), if the trust meets the requirements set forth in § 1.401(a)(9)-4, Q&A-5, with respect to the IRA.”””””
Permalink Submitted by Jonathan Mazur on Sun, 2007-09-09 19:25
Choate (3.2.08) in her latest book seems to think that this can be done if a spouse is the oldest beneficiary…the widow can simply take her distribution and rollover in a separate IRA (hers) while the remaining beneficiaries need to use birth date of oldest for RMDs. Hmmm. Also see 6.3.03 of her book…
Permalink Submitted by Jonathan Mazur on Sun, 2007-09-09 19:28
FYI….the smiley face is cute but was not my intention….
Do you have Choate’s book?
Permalink Submitted by Alan Spross on Mon, 2007-09-10 03:56
Sorry, no. Was it published after the PPA, ie. in last 12 months? Does she cite any PLRs, or is this her educated opinion?
There appear to be a series of consecutive issues to be faced here:
1) Establishing that the trust is qualified with the custodian.
2) Willingness of the 401k administrator to execute the transfer to an inherited IRA, currently optional.
3) Trust terms such that the spousal rollover appears permitted per prior PLRs. In the simple cases approved by the IRS, these were trusts where the spouse was the successor trustee and sole beneficiary.
4) Then, the central question – even if the surviving spouse can execute the rollover to own IRA, how does that effect the no separate account rules for trust beneficiaries? Disregarding a beneficiary as of 9/30 can only be done by a disclaimer or complete distribution, so is the rollover considered a distribution?
Permalink Submitted by Jonathan Mazur on Mon, 2007-09-10 13:26
Alan,
I could email you what she said….use my email here to email me and I will email you back the info. Your posted email does not work…mine should.
Permalink Submitted by Al Fry on Mon, 2007-09-10 23:39
I do not have her latest book here (its at my office), but looking at those sections in a previous edition, it appears she is referrening to a case where the trust established sub-trusts, and actually divided itself into several separate trusts. One subtrust was for the spouse, then one for each child bene. Al