satisfying rmd in year of death, 645 election for trust

Submitted by konrad kohl on Mon, 2016-04-11 19:33

Hello forum – looking for help on this matter

Here is the situation;

I have a new client engagement. The client, Elizabeth, died in 2015 without taking her complete RMD. Her trust was the IRA beneficiary. The $44,000 IRA was completely liquidated in 2015 with the proceeds going to the trust. (the trust was originally a joint trust, Elizabeth was the surviving spouse). The RMD was approximately $2,400

There is a possibility that I could use a 645 election for a fiscal year for the trust as part of the estate which would make all distributable trust income, including the IRA, taxable to the beneficiaries in 2016. All trust distributions were made early in 2016.

Questions;

Did the liquidations and distribution of the IRA to the trust as the beneficiary in 2015 satisfy the RMD distribution requirement? Or must the beneficiaries of the trust have received their ratable portions of the RMD out of the trust before the IRA was liquidated?

If RMD distribution requirements were not satisfied, is there a remedy? If not, is there a penalty?

Does the RMD have to be both distributed and taxable in 2015, the year of death, or does the RMD merely have to be distributed(to the trust) and therefore deferral of the income to 2016 via the 645 election does not pose a problem?

Hopefully I’ve provided enough background information for you. Might I also ask what your fee structure is?

Sincerely, Konrad Kohl, CPA

Konrad Kohl, CPA
Berger & Wild, PLLC
24800 Denso Drive
Suite 260
Southfield, MI 48033
Tele (248) 353-1530
Fax (248) 353-1538
Cell (248)672-5536
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Submitted by Alan - IRA critic on Mon, 2016-04-11 21:01

  • The IRS Regs only require that the year of death RMD be completed by the beneficiary (the trust in this case) had the decedent not completed it. There is no mention of when the taxes may be due, so I see no problem with a 645 election deferring the reporting of the IRA distribution. Moreover, since the IRA distribution was done in 2015, there is no need to request a waiver of the 50% excess accumulation penalty for 2015 on a 5329. The IRS will see the amount of the IRA distribution on the 1099R as a total distribution, so will know that the RMD has been distributed. In addition, since the 2015 RMD is the decedent’s RMD, the IRS has no interest in how much goes to any particular trust beneficiary.
  • In this case, whether the trust is qualified for look through or not is immaterial since a total distribution has been taken from the IRA.
  • Fee structure not applicable here as I am a private volunteer and not a Slott employee, but have been doing this for many years.

Submitted by gerard noronha on Mon, 2016-04-11 21:53

Alan u have helped a lot of people save a lot of money…u should be compensated…ed slott should take care of it…he has people on his staff /website that know less than u…I will try to contact him..thanks from me and the thousands you have helped!!!!

Submitted by Alan - IRA critic on Mon, 2016-04-11 23:14

Thanks, but no big deal. I enjoy this, oddball hobby that it is!

Submitted by Ben Meyer on Tue, 2016-04-12 05:17

  • A 645 election can be a very good idea where a trust is the beneficiary of a traditional IRA or qualified plan (non-Roth).  This is especially true if the trust does not qualify for “see-through” treatment, such as a trust that has charitable organizations as beneficiaries.  In such cases the IRA custodian or 401(k) recordkeeper may refuse to transfer funds to individual IRA beneficiary accounts.  A qualified plan may force an immediate lump-sum distribution to the trust, especially in cases where the trust does not qualify for see-through treatment.
  • This would result in the trust facing a dilemma.  The trust could make full distributions to all beneficiaries during the first taxable year, avoiding high trust taxes but creating a surge in taxable income for the beneficiaries that are natural persons, likely putting them into a higher tax bracket for all of their income.  
  • Alternatively, the trust could stay open for several years, pay taxes at the high trust rates, and distribute annual payments to the human beneficiaries, if the trust document provides for this.  Full distributions would be made to any charities during the first year.  This approach would be expensive and burdensome. 
  • A 645 election would allow the trust to make distributions to the human beneficiaries over two calendar years, but still within the one tax year of the trust fiscal year,  Therefore, the trust would not be faced with high trust taxes.  The human beneficiaries would receive their distributions in two separate tax years, so the tax burden would be only half as great each year, and may well avoid putting them into a higher tax bracket.  The result would be a two-year stretch as a compromise solution.

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