Can a 457 plan pass thru a Trust to an Inherited IRA
Nancy passed away at age 54 with a State 457 Deferred Compensation Plan. Nancy passed away 19 months ago on 11/7/2006. The 457 plan has not been moved yet to the Trust and the 5 year rule should apply. The Primary Beneficiary is the Nancy Living Trust, which is a “named non-spouse beneficiary”. The Contingent Beneficiary named is Shirley, Nancy’s sister. In the Trust, the sole Trustee is Shirley and the sole beneficiary of the Trust is Shirley.
Question 1) Can the 457 plan pass thru the Trust now (as a “qualifying see-through” trust) and transfer to Shirley as an Inherited IRA?
Question 2) What is the definition and where can I get the definition of: A “qualifying trust” and a “see through trust”? Are they the same?
Question 3) What paperwork process would be required to transfer the funds from the 457 through the Trust and into an Inherited IRA? Is this one transaction or two?
We are trying to avoid a taxable event if possible, as the 457 is about $188K.
Thanks
Pat W.
Permalink Submitted by Alan Spross on Thu, 2009-06-18 00:13
1) That depends on the terms of the trust and whether Shirley can terminate it. The plan will issue distributions to the trust until Shirley completes termination procedures and the plan accepts this as proper. Shirley needs to discuss this with the plan administrator.
2) See p 39 of Pub 590 for a list of requirements. These terms both refer to the same requirements for the end purpose of allowing individual trust beneficiaries to be treated as “designated beneficiaries.” You will see that a copy of the trust should have been provided to the plan administrator no later than 10/31/2007 and if not, then it is technically too late for the trust to be considered qualified. As you said, this will trigger the 5 year rule since the trust will be considered a non individual beneficiary.
3) You could set up the inherited IRA for the trust beneficiary (or for Shirley if the trust can terminate and the plan assigned, if the plan concurs with the termination). However, the 5 year rule would still apply, so the tax would just be deferred for a short time. If the IRA is distributed to the trust, then the entire amount is taxable at Shirley’s rates since the distribution would be passed through on a K1 unless the trust says otherwise. If the plan will only distribute a lump sum, getting the IRA transfer done will at least allow it to be spread over 5 years, actually 6 years because 2009 does not count as a year for purposes of the 5 year rule.