401a Rollover to a Trust

Submitted by MIKE KRUCHTEN on Wed, 2016-06-29 15:03

I had a client who recently passes and she had named her Qualified Living trust as her Primary Beneficiary. The plan has never had an employee name a Trust as primary beneficiary so is confused. They requested IRS info to prove that the plan can rollover the proceeds to the Trust otherwise they will process as a full disbursement. Also, since the distribution is going to an entity they claim no Federal taxes have to be w/ held. I’m under the impression that the Trust which is named as Primary Beneficiary can rollover the proceeds to a Bene IRA which the Trust will own. Another solution could be to not deal with plan and received the distribution checks w/ out tax w/ holding and process a 60 day rollover. However, I think 60 day rollover are prohibited on Bene IRA’s. Looking for any advice with links or documents to support the best alternative. The rollover amount is $225,000 and bene’s of Trust prefer to stretch is legally possible.



Submitted by Alan - IRA critic on Wed, 2016-06-29 20:50

  • A death benefit paid to a non spouse beneficiary or entity cannot be rolled over. Therefore, if a lump sum is paid to the trust, it will be taxable and any stretch will be lost. If the trust provisions allow the trustee of the trust to terminate it, the plan benefit can then be assigned to an inherited IRA in a direct trustee transfer. Only eligible rollover distributions are subject to mandatory withholding, and since distributions out of the plan cannot be rolled over, there is no mandatory withholding, but there could be optional withholding.
  • The trustee of the trust must submit trust information to the plan administrator, so the plan can determine if the trust is qualified for look through treatment or not. Most trusts are. If qualified, the RMDs paid to the trust will be based on the age of the oldest trust beneficiary including any remainder beneficiaries. The trust will be allowed to accumulate the RMDs or other distributions or will have to pass them through to the trust beneficiaries. If accumulated the trust pays taxes at the higher trust rate, if passed through each year the taxes are paid by each trust beneficiary on their individual 1040 forms. If the plan participant passed prior to the required beginning date and the trust is not qualified, the 5 year rule will apply.
  • The main point here is to resist the plan’s inclination to issue a lump sum distribution to the trust. If this happens, taxes will be due and the stretch will be lost. If the trustee submits trust information to the plan, it is up to the plan to determine if it is qualified or not. If they do not feel qualified to do this, they need to hire counsel to review the trust to determing if it is qualified. Since the plan apparently wants to avoid this issue, the trustee of the trust must be very firm in telling the plan that no lump sum distribution is to be made unless the plan provisions specify that  outcome. It is unlikely that the plan addresses this, so the plan must follow IRS rules until the written plan document is more restrictive.

Submitted by MIKE KRUCHTEN on Thu, 2016-06-30 02:07

Confused on first part of your response. To provide some facts; the trust is Qualified and the qualified plan doesn’t have language specifying only a lump sum. The representative from the 401a plan wanted IRS language or information to confirm the plan could allow a rollover to an entity(or trust). When you say ” If the trust provisions allow the trustee of the trust to terminate it, the plan benefit can then be assigned to an inherited IRA in a direct trustee transfer”. If no rollover is allowed to an entity then how do we accomplish movement of the funds to a Inherited IRA? The trust has specific language allowing the trustee to stretch any IRA or qualified plans. I’m having issues with the logistics. I assumed the qualified plan would have allowed a direct rollover to an Inherited IRA with trust as owner. 

Submitted by MIKE KRUCHTEN on Thu, 2016-06-30 02:16

When you state “death benefit”, is it a db since its a 401a plan? If the client had a 401k plan with trust named as primary beneficiary could the proceeds be rolled over to a Beneficiary IRA? My own 401k plan has my Trust as primary beneficiary and the trust is qualified with stretch language. My intent is not to force my successor trustee to take a lump sum from my 401k rather have option to move to Bene IRA. My clients situation has me both concerned and confused if this option will exist.

Submitted by Alan - IRA critic on Thu, 2016-06-30 03:03

  • The transfer of the IRA out of the trust to an inherited IRA for the trust beneficiaries has been a long standing challenge, not with the IRS but with plan administrators. Noted expert Natalie Choate discusses this issue in the following article including useful links to letters that could be sent to the plan administrator:    https://www.ataxplan.com/bulletin-board/notice-to-executors-and-trustees/
  • Note that the trust provisions must allow for the IRA to be transferred out of the trust, or give the trustee of the trust the authority to make such a transfer. If so, these are never rollovers, but must be done as direct trustee transfers. Such a transfer will provide the trust beneficiaries control of their own inherited IRA accounts, but will NOT alter the RMD divisor for beneficiaries established under the trust.
  • By “death benefit” I was referring to plan assets payable to a beneficiary of the plan due to the death of the participant.
  • Note that in the process of determining qualification, the language included in the trust is only part of the criteria. The appropriate trust provisions must be submitted to the plan administrator by the trustee of the trust no later than 10/31 of the year following the year of the participant’s death. If the trustee happens to miss that deadline the trust must be treated as non qualified. I assume this has been done in client’s case, but it is not clear whether this plan is resisting for any valid reasons, or they just do not understand all the issues.

Submitted by Bruce Steiner on Thu, 2016-06-30 19:10

Why did the participant name a trust that is to be distributed immediately as beneficiary?  He/she could have named either the individual beneficiaries or separate trusts for their benefit as the beneficiaries of the retirement benefits (most likely the individuals given the amount involved).

Submitted by Ben Meyer on Thu, 2016-06-30 20:40

  • Assuming that the trust will hold the IRA for some period of time, I’m not fully understanding how the 401(k) is transferred to the trust upon the death of the account holder.  This assumes that distributions will be made from the IRA in accordance with the measuring life, or in accordance with the 5-year rule. 
  • The first step looks like transferring the 401(k) acccount from the name of the decedent to an IRA account in the name of the trust.  Is the IRA titled something like “Smith Family Trust, Mary Smith, Trustee as successor to John Smith, deceased”, or something similar?  The successor trustee will also need to obtain an EIN for the trust and furnish the number to the 401(k) recordkeeper or new IRA custodian.  According to IRS guidelines it looks like the new IRA title needs to include the name of the trust, the name of the successor trustee for the trust, and the name of the decedent.  The current recordkeeper can perform an internal transfer to a new IRA account with the new trust title and trust EIN, assuming that the same institution also offers IRA accounts.  
  • Importantly, this must be done to keep the account as a qualified IRA account, and not merely make a distribution to a non-IRA account in the name of the trust
  • This all assumes that the trust holding the IRA will take annual distributions with the applicable divisor and then release the funds to the individual beneficiaries as DNI.  Is this the correct way to re-title the trust for continuing it on a long-term basis?
  • Another question is how the transfer from 401(k) to IRA will be reported on form 1099-R.  Is the correct distribution code “4G” for a direct rollover upon death?  Code”4″ without the letter “G” seems incorrect as it implies a distribution and not a direct rollover.

Submitted by [email protected] on Thu, 2016-06-30 21:49

Alan, you said “The trustee of the trust must submit trust information to the plan administrator, so the plan can determine if the trust is qualified for look through treatment or not.”  Who is responsible for making sure the trust qualifies for stretch distributions?  In your comment it appears you are saying the plan admiinistrator.  Is it not the Trustee’s responsibility?  If so, why is the delivery of documents to the plan administrator by the deadline (sept of year following ?) a requirement for trust qualification?  Thanks,-m

Submitted by Alan - IRA critic on Thu, 2016-06-30 22:41

The plan administrator must determine if the trust is qualified for look through, but the trustee of the trust is responsible for submitting the trust information by the deadline to enable the plan administrator to make the determination. Prior to participant’s death the plan may have collected only minimal trust information. If the trust was drafted incorrectly or the trustee of the trust misses the 10/31 reporting deadline, the qualified plan will have to treat the trust as non qualified under the IRS definition of a qualified trust. As such, the possibility of transfer to an inherited IRA is eliminated even if the trust provisions allowed the trust to terminate. This is the case because Sec 829 of the PPA as clarified in Notice 2007-7 limits transfer to an inherited IRA for designated beneficiary individuals or trusts that are qualified. If not qualified, many plans contain provisions calling for a lump sum distribution to the trust and the stretch is lost. These non qualified trusts are treated the same as estates. These plans do not want to even bother with 5 year rule implications or the remaining life expectancy of the decedent. They will just disburse a lump sum check. So there are reasons for a deadline in determining if a trust is qualified or not, since RMDs depend on it, and generally start by the end of the year following the year of the participant’s death.

Submitted by [email protected] on Thu, 2016-06-30 23:27

Is this the same for IRA custodians?

Submitted by Alan - IRA critic on Fri, 2016-07-01 00:01

Pretty much the same, although if a trust is not qualified, with an inherited IRA the RMDs can be taken under the 5 year rule if death is prior to RBD, or decedent’s life expectancy for death post RBD. For a qualified plan, a non qualified trust will usually result in a lump sum distribution since the death benefit cannot be transferred to an inherited IRA. 

Submitted by [email protected] on Fri, 2016-07-01 12:57

Ok, so can you site me IRC or other that states IRA custodians and/or plan administrators are responsible for determining the qualification status of a trust as beneficiary?  I’d really appreciate it. – m

Submitted by Alan - IRA critic on Fri, 2016-07-01 18:07

All I can locate is the following portion of IRS Reg 1.401(a)(9)-4 Q 6:

(c) Relief for discrepancy between trust instrument and employee certifications or earlier trust instruments. (1) If required minimum distributions are determinedbased on the information provided to the plan administrator in certifications or trust instruments described in paragraph (a) or (b) of this A-6, a plan will not fail to satisfy section 401(a)(9) merely because the actual terms of the trust instrument are inconsistent with the information in those certifications or trust instruments previously provided to the plan administrator, but only if the plan administrator reasonably relied on the information provided and the required minimum distributions for calendar years after the calendar year in which the discrepancy is discovered are determined based on the actual terms of the trust instrument. 

As such, it is a joint responsibility and the trustee can be asked provide a certification of compliance by the administrator OR they can simply submit portions of the actual trust if they do not want to provide a certification. In other words, the basic responsibility of the plan administrator is to meet RMD requirements, but this Reg relieves them of responsibility if they are misled by the trustee in any way. This is important because the plan can be fined under EPCRS for 401(a)(9) failures. It is logical to think that the party that can be made financially responsible for compliance is also responsible for determining whether the trust is qualified, but with assistance from the trustee. At the end of the day, the IRS could probably go after either of them. I imagine small plan administrators retain legal counsel to review these trusts and/or depend on certification from the trustee in making their decision. Qualified plans can force out an RMD based on their conclusion, but IRA custodians cannot. But an IRA custodian must provide an RMD figure to the IRA beneficiary upon request, and then the beneficiary can apply the aggregation rules to determine which account funds the RMDs if there is more than one inherited from the same decedent. In summary, I’ll restate the responsibility as a joint responsibility of both the administrator and the trustee, rather than a sole responsibility of the administrator.

Submitted by [email protected] on Fri, 2016-07-01 18:16

thanks much. -m

Submitted by Ben Meyer on Sat, 2016-07-02 14:46

Does anyone have any thoughts on how an IRA for a qualified trust should be titled to receive a direct rollover from a 401(k)?  Thanks, Alan, for referring to Notice 2007-07, which addresses the general question.  However, the question of titling for a qualified trust is only vaguely addressed (Q/A-13 & 16).

Another question is how the transfer from 401(k) to IRA will be reported on form 1099-R.  Is the correct distribution code “4G” for a direct rollover upon death?

Submitted by Alan - IRA critic on Sun, 2016-07-03 16:51

  • Benn, I think that the same guidelines apply as for an individual beneficiary. The title must show the name of the decedent and the beneficiary, in no particular order. Custodians will require the title to conform to their processing platform. For a trust beneficiary, the name of the trust should suffice but could also be accompanied by the name of the trustee, eg “David Holmes, trustee of the Holmes family trust as beneficiary of Mary Holmes”.
  • Yes, 4G would be the 1099R code for the direct rollover to inherited IRA, or 4H for a designated Roth direct rollover.

Submitted by Ben Meyer on Sun, 2016-07-03 17:19

Thanks Alan, that clarifies it.

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