Estate as Beneficiary, Trust Created by Will
My mother-in-law died last year (before RBD), and she left an IRA that designated her estate as the beneficiary. Her will in turn sets up a trust for the benefit of her two grandchildren (and any future ones, but there won’t be any more); the trust also allows the trustee (my wife) to use her discretion for withdrawing funds and allows them to accumulate in the trust. This doesn’t sound like a conduit trust, but we are considering reforming the will to make the trust conform to IRS regulations.
Our goal is to enable transferring the IRA to two inherited IRAs, one for each grandchild’s trust. But we’re not sure, even if we can reform the will and trust, will this allow the IRA’s to be stretched over the children’s lifetimes. The trust is not named directly by the beneficiary form, and we’re concerned the IRS won’t consider it a “designated beneficiary”. And in the event it is ok, will her death occurring before RBD force the 5-year rule?
Permalink Submitted by Bruce Steiner on Mon, 2013-04-08 13:39
Conduit trusts rarely make sense. If the beneficiary lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust. All of the assets will be thrown into the beneficiary’s estate, and will be exposed to the beneficiary’s creditors and spouses.You didn’t say whether she named her estate as the beneficiary, or whether she didn’t name a beneficiary. If she didn’t name a beneficiary, you might check to see if, under the IRA agreement, the default is her estate, or her children (and, if it’s her children, what would happen if a child disclaims). If the IRA goes to her estate, either because she named her estate or because the default is the estate, then, as you noted, the 5-year rule will apply. The 5-year rule gets you to the end of the 5th calendar year following the year of death, so by using a fiscal year you may be able to spread the tax over 7 taxable years.For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.
Permalink Submitted by Bernard Derboven on Mon, 2013-04-08 16:36
Thanks for the reply and the link. The IRA beneficiary designation form was changed a year ago to benefit her estate. It used to be for her first (and at the time, only) grandchild, but when she drew up her will last year she changed the beneficiary to her estate and set up the trust in the will to include her second grandchild.The IRA is not large, only about $50K, so we aren’t concerned about future creditors; the expectation is most of the assets will be used to fund higher education or a home. Our only issue is trying to stretch the IRA over the grandchildren’s lifetimes (75+ years) rather than 5 years, so we can minimize taxes. I have seen some information that suggests we might be able to qualify the trust as a beneficiary, but I don’t know if it can be done in the scenario that the IRA designated beneficiary is the estate and the will leaves the residuary (which in this case is the entire IRA) to the trust. Even if we can accomplish that and pass the IRA directly to the trust(s), I don’t know if the fact she died before RBD would require the 5-yr rule.The attorney acting as executor wanted to reform the beneficiary designation to name the grandchildren. Does this sound feasible? I have my doubts as to how successful that would be, since it would need IRS approval and that doesn’t seem likely to me.
Permalink Submitted by Bruce Steiner on Mon, 2013-04-08 19:20
There are private letter rulings going both ways on reforming beneficiary designations. See PLR 200742026 http://www.irs.gov/pub/irs-wd/0742026.pdf (reformation not recognized) and 200616039 (reformation recognized) http://www.irs.gov/pub/irs-wd/0616039.pdf. I don’t think it’s practical to try for $50,000, especially given the uncertainty as to the result.