Client age 77 dies. Beneficiary is Test. Trust
An ex-EE at a hospital i adminster has passed away at age 77. The beneciary was a testamantary trust. The custodian is saying that the 403b has to be paid out as a lump sum (b/c test. trust is beneficiary) and cannont be directly rolled over(trustee-trustee) to an IRA within Trust so that the rmds can be take out over life exp. Any help or input would be greatly appreciated.
Permalink Submitted by Alan Spross on Wed, 2009-10-21 19:29
The issue here is whether the testimentary trust is qualified or not. If it is, the plan must allow the transfer to an inherited IRA with the trust as beneficiary starting in 2010 for plans that use a calendar year for their plan year. The following is copied from IRS Notice 2007-7:
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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.
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Note that the wording above indicates that the plan “may” make a direct rollover. This rollover was optional until last December’s tax legislation (WRERA) made such transfers mandatory for plan years beginning after 2009, by amending Sec 824 of the PPA. You need to determine if the trust is qualified per Pub 590, p 39, and then wait until January to make the request when they can’t refuse.
If the trust does not meet the requirements for qualification, then you are stuck with the plan’s provisions.
Permalink Submitted by [email protected] on Thu, 2009-10-22 14:42
Alan,
Thanks so much. One more question.
The trust does qualify as a “see-through” trust. The RMD’s can be taken out based on the oldest beneficiaries life expectany. Is this the case regardless of whether or not the decedent was over 70.5 or not.
Thanks again
Permalink Submitted by [email protected] on Thu, 2009-10-22 18:18
Alan,
I ran across something verifing what you said about the rollover being mandatory starting in 2010 but it also said that 403b and 457b governmental plans will continue to be voluntary.
Any thoughts on this? Any official resources you can point me to. I did find IRS Notice 2007-7 but it doesn’t say one way or the other.
Thanks
Permalink Submitted by Alan Spross on Thu, 2009-10-22 22:54
Nick,
403b and givt 457 plans were included as qualified retirement plans in Notice 2007-7 and WRERA just made the non spouse transfer mandatory for the plan included in 2007-7. There does not appear to be any exception for 403b plans to these rules. I checked several bulletins released by retirement benefit consulting firms, and they all appear to be in agreement on this.
With respect to qualified trust beneficiaries, the life expectancy rules based on the oldest beneficiary will apply regardless of the time of death of the 403b owner. However, the time limit for doing the rollover described in 2007-7 continues, ie the transfer must be completed prior to the end of the year following the owner’s death, or the inherited IRA RMD options will have to be the same as those of the plan. This means if you have a 403b plan where the owner passed in 2008 or earlier and prior to RBD, and the transfer is not completed by 12/31/09, then the 5 year rule would or lump sum requirement would apply to the inherited IRA.
Permalink Submitted by [email protected] on Fri, 2009-10-23 13:02
Great!!! Thank you so much. I really appreciate your help.
Nick