How does one segregate an IRA with trust as beneficiary?
I’m dealing with an inherited IRA with a trust as designated beneficiary. The beneficiaries of the trust are three sibblings. I have found IRS PLRs 200444033 and 200008044 that tell me we can end up with each sibling having an inherited IRA under his/her own control, but the PLRs do not provide detail on the logistics of “segregating” the IRA. The financial institution in question is proposing to convert the IRA directly into three inherited IRAs, each one under the control of one of the siblings, but that approach concerns me because it seems to bypass the trust altogether. I would have thought it more appropriate for the IRA to be converted into three inherited IRAs, one for the benefit of sibling #1, another for the benfit of sibling #2, etc., but with all three under the control of the trustee. Each of these IRAs could then be transferred to the control of the respective siblings via another trustee to trustee transfer. This may be jumping through hoops to achieve the same end result, but I wonder if the IRS requires form over substance in these matters, and this approach is more consistent with the controlling documents, i.e., the IRA first becomes an asset of the trust, which is consistent with the trust being named as beneficiary; and then the segregated IRAs are transferred to the siblings, which is consistent with the trustee’s authority to distribute the assets of the trust to the trust beneficiaries.
Or am I overcomplicating this, and the approach proposed by the financial institution is the accepted way of doing this?
Permalink Submitted by Alan Spross on Thu, 2009-09-10 20:15
Apparently, the IRA custodian has reviewed the trust and agrees that the trustee has the authority to terminate the trust and/or assign the IRA directly to the trust beneficiaries. If so, each IRA would be re titled in individual inherited IRA fashion, continuing to show the name of the original owner. However, since separate account rules for RMDs do not apply to trust beneficiaries even if the trust is qualified for look through treatment, the inherited IRA account of each trust beneficiary will have to use the RMD divisor of the oldest trust beneficiary. This only becomes a drawback to the extent they vary in age.
I don’t think the IRS cares about the procedural order, but with fewer changes in the IRA title, the fewer reporting documents must be produced. Also, if a change in IRA custodian is contemplated, then getting the accounts into the individual names first will make an actual TT transfer possible because a TT transfer must be to identical registered accounts and TINs. The SSN of the respective beneficiary is not assigned to these accounts until the trustee disappears.
Financial institutions have varying reporting platforms and procedures, and if any created problems they would have to be quickly revised. I don’t see their approach here as creating any problems. The IRS concern when it comes to IRA accounts leans heavily on insuring that RMDs are issued accurately and timely.