Beneficiary IRA in name of Trust
My mother died in 2006. She designated her 4 children as beneficiaries of her IRA. Since one of the children (my sister) was on disability, and my mother had established a Special Needs Trust for her, my sister disclaimed her portion and it went into the name of the Trust. So the IRA was titled “Jane Doe Trust as Beneficiary of Jane Doe.” In 2011 my sister died. The provisions of the Trust direct that, subsequent to the death of my sister, the Trust would pass to the remaining 3 siblings.
I made a request to the custodian bank to establish new beneficiary IRAs for the 3 remaining siblings. For example, the IRA would be titled, “John Doe as Beneficiary of Jane Doe Trust.” The bank refused and insist that the proceeds of the IRA must be paid out to the Trust. I have asked them for an IRS cite to back up their action, but they did not give me one. They state that you cannot establish a beneficiary IRA from another beneficiary IRA.
Can anyone give me guidance on this unique situation? Thank you.
Permalink Submitted by Alan Spross on Thu, 2012-03-15 22:22
That reaction is very typical of IRA custodians, particularly banks. Much less liability when they can issue either a lump sum or partial distributions directly to an estate or trust.
I don’t follow the interests of all 4 beneficiaries here, but an SNT must comply with various state laws and there should be definite provisions regarding termination at the death of the SNT beneficiary. The bank cannot just issue a check without a request for it unless their IRA agreement indicates so. It would appear then that if the trust terminates following the death of the SNT beneficiary, the bank will no longer have the choice of issuing a check to the trustee of the trust. But rather than fight the bank, it would generally be easier to request a direct transfer to another IRA custodian, after they have reviewed the trust or after the trust has terminated.
Was the trust named as a contingent beneficiary for your sister’s share on the IRA? Trying to understand exactly how the SNT trust became an IRA beneficiary for 25% of mother’s IRA.
Permalink Submitted by Jose Morales on Fri, 2012-03-16 00:08
This doesn’t sound like a valid disclaimer to begin with. Your sister could not have disclaimed her portion of the IRA for which she was beneficiary and then named a completely new beneficiary (the special needs trust) that was not listed as a beneficiary to begin with (contingent or otherwise). Upon disclaiming her beneficial interest in the IRA the proceeds would then be divided equally amongst the remaining beneficiaries, unless there was some other language in the IRA Agreement regarding the succession of a beneficiary’s share upon disclaiming. You also have the issue of a person disclaiming their beneficial interest of an IRA only to then have a Trust be the beneficiary for which the very same person is a beneficiary, which is also not allowed.
Permalink Submitted by Linda Zaleski on Thu, 2012-03-22 18:33
The disclaimer and establishment of the 25% interest in my mother’s IRA into the name of the special needs trust were processed per IRS PLR 2006-20025. The cite was Q & A with Natalie Choate dtd 12-08-06.
Permalink Submitted by Alan Spross on Fri, 2012-03-23 00:14
OK, but note that 2006-20025 mentions a disclaimer only by the guardian, not by a beneficiary. In your intial post it was not clear exactly who disclaimed and when. In the PLR the disabled beneficiary had already created an inherited IRA for their share and the PLR allowed the SNT to be treated as a grantor trust of the beneficiary funded with the beneficiary’s own inherited IRA.
http://advisor.morningstar.com/articles/printfriendly.asp?s=&docId=12631…
Also, note that this form of grantor SNT required that the state be the primary SNT beneficiary to recover paid Medicaid benefits. In your situation, was the state or other govt agency not named as primary beneficiary, or was the state paid off and there are funds remaining to be split 3 ways?
The above were additional questions just to help understand the total situation, but more directly to your question, if the SNT clearly names the 3 of you as successor beneficiaries of your sister’s trust, there is no reason the IRA Custodian should refuse to establish new inherited IRAs as long as any other beneficiaries under the trust had been paid off. If the IRA custodian has concerns about the trust, they should identify them, not make an incorrect statement that a new beneficiary IRA can never be established.
Permalink Submitted by Linda Zaleski on Sat, 2012-03-24 19:10
Thank you for your insight into this situation. I pulled a copy of the original disclaimer form. It was signed by my sister (the decedent) as beneficiary and heir-at-law, and by myself and my other sister as successor Co-Trustees of the SNT.
In answer to another of your questions, the state was not named as a beneficiary. The original Revocable Trust was established by my mother before her death, and became a SNT by virtue of its language after her death.