More Questions Regarding Trust as IRA Beneficiary
Scenario:
1. Trust was named as IRA beneficiary
2. IRA owner passed away
3. IRA was then set up as a beneficiary IRA referencing the deceased and the trust
4. Now the 2 non spouse beneficiaries of the trust want to split the IRA and transfer the IRA to their own personal IRAs at different custodians.
5. We are aware that the RMDs have to be based on the life expectancy of the oldest non spouse beneficiary. We also believe this trust qualifies as a see through trust and is allowed to terminate. All trust documents have been delivered to the custodian.
Question 1: For future reference, should the custodian have skipped step 3 and gone right to step 4 and transferred the IRA directly to the beneficiaries of the trust?
Question 2: Is it still possible at this point to transfer the IRA to the beneficiaries of the trust?
Question 3: In general, what would the titling look like if the IRA was transferred to the beneficiaries of the trust? I’m assuming it would reference the deceased, the trust FBO the beneficiary of the trust and be held under the beneficiary’s social security number.
Question 4: Could the change of titling from the trust to the beneficiaries happen between custodians (since we are changing custodians in this scenario) or would it have to happen at the primary custodian and then transferred. And/or could we transfer the trust beneficiary IRA to another custodian and at that point transfer it to the beneficiary of the trust.
Question 5: Since all trust documents have been delivered to the custodian by Oct. 31, is there any kind of similar deadline if the beneficiaries are trying to transfer this IRA to another custodian? Does it have be transferred by Oct. 31 to that the new custodian can have the trust documentation by Oct. 31?
Thanks for your help.
Permalink Submitted by mk foss on Fri, 2009-10-23 01:17
I don’t think that the custodian should have skipped step 3 – the trust was the beneficiary and the IRA should have been transferred to a beneficiary IRA.
The IRS has issued many rulings where they’ve allowed the trust to “distribute” the beneficiary interest in the IRA to the trust beneficiaries. The custodian may have a procedure for this. Natalie Choate’s book gives a sample letter to a custodian to accomplish this and I’m sure other attorneys (Bruce, are you there) may also have some good advice on how to accomplish a split.
Your only required action by October 31 is to get the paperwork to the custodian so that the trust is named as the IRA beneficiary on a timely basis. Splitting the trust’s interest can and ususally does occur at a later time – perhaps years later.
Permalink Submitted by Jack Thomas on Fri, 2009-10-23 02:37
Ms. Foss, thank you for your insightful response. I’ve read some of Natalie Choate’s articles which are very helpful. I’d also be interested in hearing from Bruce if he has anything to add about getting this account transferred to the IRA beneficiaries. So far the representative from the custodian had not been helpful.
Permalink Submitted by Alan Spross on Fri, 2009-10-23 03:44
Some of these custodians are extremely gun shy when it comes to making decisions with potential litigation implications. While the original custodian has all the trust documentation for purposes of determining look through status, they may be even more concerned with taking responsibility for agreeing with the trust termination provisions and establishing separate accounts. Still, it might be easier to pursue this than having to take this issue up with an entirely new IRA custodian or more than one if each trust beneficiary elects a different custodian.
In addition, I do not think an ACH transfer can be done from a trust beneficiary to an individual using a SSN. This is another reason to not skip step 3 and try to get the re titling of the IRA done there before transferring them out to new IRA custodians in the name of individual beneficiaries.
And as originally stated, the RMD schedule will not be changed by this, as the oldest trust beneficiary’s life expectancy carries over to new inherited IRAs for younger beneficiaries.
Permalink Submitted by Bruce Steiner on Sat, 2009-10-24 23:03
The attorney handling the estate should be able to accomplish this, if not with the current custodian then with another one.
The estate plan doesn’t seem to make any sense. Why would the IRA owner go through the complexity of naming a trust as beneficiary of the IRA only to have the trust immediately distribute its assets to its beneficiaries? If the IRA owner wanted the beneficiaries to receive their shares outright, he/she could have simply named them as the beneficiaries of the IRA. Or, to better protect the inheritances from the beneficiaries’ potential creditors (including spouses), and to keep the inheritances out of the beneficiaries’ estates for estate tax purposes, the IRA owner could have left the IRA to the beneficiaries in trust rather than outright.
For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .