Inherited IRA and Designated Beneficiary Trust

Submitted by Scott Andreiko on Wed, 2017-01-25 18:44

This might be a pretty complex issue! My father died in 2015 and provided that PART of his IRA would go into a Designated Beneficiary Trust for his wife and Trust agreement provided when she died the remainder of the IRA/Trust would go to my sister and me. (My sister and I did receive the balance of his IRA account that was not set aside for his widow and the funds went into Inherited IRA accounts for each of us.)

My sister and I are the Trusteess of the Trust and recently received approval from the Court to terminate the Trust now and distribute the IRA account with half going to my Dad’s widow and 1/4 each going to my sister and me. (The widow requested this change.)

My questions are two 1) Could the widow roll her distribution into an IRA account that she would have to create and would this need to be an Inherited IRA account and 2) Could my sister and I roll our distributions into our existing Inherited IRA accounts? Schwab holds the IRA accounts and they will send out a 1099R for this distribution that says the TRUST received the distributions.



Submitted by Alan - IRA critic on Wed, 2017-01-25 19:36

Has it been determined if the trust is qualified for look through treatment?  If the trust did not provide the trust information to Schwab by last October, then the trust is not qualified. Did father pass before his required beginning date or after?  Who is  requesting a distribution rather than a transfer out of the trust? If there is no distribution, a transfer to an inherited IRA should not be taxable, and you need to find out why Schwab maintains that it is?  Has a distribution check already been issued? If so, that would be a taxable event. A non spouse beneficiary can never roll over a distribution, but they can have a direct transfer made that is not taxable and RMDs could still be stretched over a period of years. His widow on the other hand may be able to roll over her share, but it might require a costly private letter ruling.



Submitted by Scott Andreiko on Thu, 2017-01-26 19:26

Hi Alan,I’m not sure what “look thru” treatment means but the Trust was written to qualify for Marital Deduction uner 205(b)(7) and also to qualify as a “designated beneficiary” per 401(a)(9).  WE did provide a copy of the Trust document to Schwab when the account was opened in January 2016 so I hope that is the Trust information you referred to.   My dad died after beginning required minimumdistribution.    My sister and I as Trustees would be the ones requesting the distributions and I don’t know what Schwab would say about transferring our shares to our existing Inherited IRA account – I wanted to know more this before asking Schwab about it.   (Getting involved with asking Schwab legal/technical issues can become a quagmire and I want to be prepared beforehand for what might come up.)   I think an expensive private letter ruling is not an option for the widow but do you sea any reason why she could not do a transfer to new Inherited IRA account in her name?



Submitted by Alan - IRA critic on Fri, 2017-01-27 00:12

  • If the trust actually qualifies as a designated beneficiary per 401(a)(9), it would be qualified for look through. Sending a copy of the entire trust to the IRA custodian should also meet the custodian notification requirement. Therefore, Schwab would likely agree that the trust is qualified.  If the trust permits you to dissolve the trust you can transfer the IRA to inherited IRAs for each of you. However, by doing so you give up any creditor protection from the trust unless you live in one of the states that has passed statutes to protect inherited IRAs from creditors. Note that Schwab only needs to agree that the trust can be dissolved, since it can be transferred to inherited IRAs whether it is qualified or not but the RMDs for those inherited IRAs will be higher if the trust was not qualified.
  • The widow could transfer into an inherited IRA, however her RMDs would be much higher than for an owned IRA and she would have to reduce her RMD divisor by 1.0 each year because she was not the sole beneficiary.
  • The inherited IRA separate account rules do NOT apply to trust beneficiaries. My understanding is that your Dad has just ONE IRA account, with the trust inheriting part and the two of you the rest. The separate account rules would allow you to use your own life expectancies for the portion of the IRA left directly to you, however as beneficiaries of the trust, the separate account rules do not apply. This means that if the trust can be dissolved and your interest in the trust assigned to an inherited IRA, it MUST be a different inherited IRA than the one you already set up because the RMD divisors will be different. For the inherited IRA from the trust, the oldest trust beneficiary (could be the widow) life expectancy will apply to each of the 3 trust beneficiaries. With different divisors, they must be different accounts. If you combined them by accident, the result would be that the higher RMD would then apply to the entire account.


Submitted by Scott Andreiko on Fri, 2017-01-27 20:08

Wow – I’m very impressed with the detail/extent of your knowledge on what I thought was a pretty esoteric and hardly ever seen situation!!!!!   Are you an attorney or tax accountant? 



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