Inherited RMD beneficiary – Trust vs. Individual
A client died and named his Trust as his IRA beneficiary. The Trust in turn, named 5 individual beneficiaries and specified their individual share in the Trust. Our client who is one of the Trust beneficiaries, opened an Inherited IRA in his name as beneficiary of his deceased brother, for example, John Doe INH IRA; Bene of Jim Doe. Does the client (John Doe) have to take the RMD based on his own life expectancy or the life expectancy of the oldest beneficiary of the Trust? My confusion lies in the fact that his Inherited IRA is set up in his name as opposed to an Inherited IRA in the Trust name (i.e. Doe Family Trust). Thank you.
Permalink Submitted by Alan Spross on Mon, 2011-11-28 22:52
He might eventually be able to utilize the inherited IRA, but only if the trust provisions permit the trust to terminate or give the trustee authority to assign the IRA in shares to the trust beneficiaries. Until those requirements are met, he will not be able to transfer his share to his own inherited IRA. Also, note that the separate account rules do not apply to trusts, so even if the trust is qualified for look through treatment, the age of the oldest trust beneficiary must be used for all the individual trust beneficiaries. One of the requirements of a qualified trust is to submit the document to the IRA custodian no later than 10/31 of the year following the owner’s death.
Following is an article by Natalie Choate regarding the transfer of an IRA out of an estate or trust:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Bruce Steiner on Tue, 2011-11-29 04:17
Why would anyone name a trust as beneficiary only to have the trust terminate and distribute its assets to the beneficiaries of the trust outright? If the IRA owner wanted the beneficiaries to take outright, he/she could have named the individuals as the beneficiaries of the IRA. Or, if the IRA owner wanted to keep the IRA benefits (as well as any other assets) out of the beneficiaries’ estates, and better protected them from the beneficiaries’ potential creditors (including spouses), he/she could have left the IRA benefits (and any other assets) to the individuals in separate trusts for their benefit.
Nevertheless, despite the unnecessary complexity of this structure, as Alan pointed out, the trustees should be able to distribute the inherited IRA to the beneficiaries in kind, though it may take some effort in dealing with the custodian.
Permalink Submitted by Dave Petersen on Tue, 2011-11-29 17:35
Thank you both for the great information. So, my client HAS already met the requirement of transferring his share into his own Inherited IRA (& so did the other beneficiaries). We then did a Custodian to Custodian transfer of his Inherited IRA at Custodian 1 to an Inherited IRA at Custodian 2 (where my firm custodies client assets). So, based on your feedback, it appears that since the Trust was the original beneficiary of the deceased’s IRA, then the age of the oldest individual beneficary should be used for each of the individual beneficiaries, correct? And, that age factor would be used indefinitely (i.e., not just for the RMD for the year of death)? Again, thank you for your help.
Permalink Submitted by Alan Spross on Tue, 2011-11-29 17:49
Yes, indefinitely. The divisor for the oldest trust beneficiary based on their age in the year following client’s death applies to all trust beneficiaries taking RMDs from their inherited IRAs in that year. And for each year following that divisor is reduced by 1.0 for all of them.