Trust as Beneficiary

Submitted by John Boyle on Tue, 2017-05-02 17:30

When having a trust as the beneficiary for a Traditional IRA, is there a certain way the title has to read on the beneficiary form? I have a client’s attorney saying the title of the beneficiary (on the form) can’t say “Jane Doe Trust”, but that it must read “the separate subtrusts created under the Jane Doe Living trust”. The attorney is saying that for the IRS to recognize the pass thru, the title needs to be this way. I have never heard of this. Has anyone dealt with this?

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Permalink Submitted by Bruce Steiner on Wed, 2017-05-03 01:56

You should say it in a way so that there won’t be any ambiguity.

If you leave it to the “Jane Doe Trust,” will the “Jane Doe Trust come into existence in all events? Is it clear what happens if Jane Doe predeceases the IRA owner?

If you leave it to “the separate subtrusts …,” is it clear who gets what?

What is a subtrust?

Whatever you do, make sure the trusts qualify for the stretch. In other words, nothing can ever go to anyone older than the person whose life expectancy you want to use, or to anyone other than an individual or another trust subject to the same restrictions.

For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.elderlawanswers.com/Documents/Trusts%20as%20Beneficiaries%20of%20Retirement%20Benefits.pdf .

Permalink Submitted by John Boyle on Fri, 2017-05-05 00:45

the IRA owner, Jane Doe, creates her living trust called the “Jane Doe Living Trust”, and wants to name her trust as beneficiary. Her attorney wants it to read that the subtrusts of the trust is the beneficiary. My company won’t allow it, saying you can’t name a trust within a trust as beneficiary. Her attorney is adamant that the IRS wants more clarity when titling the beneficiary. I don’t know who is correct. I would love to supply chapter and verse to my legal department, but the attorney won’t give it to me. I don’t know what to do other than to tell the client to go elsewhere. Any suggestions?

Permalink Submitted by Bruce Steiner on Fri, 2017-05-05 02:01

You can create as many trusts as you want in a single Will or trust agreement. For example, you could create in your Will a marital (QTIP) trust for your spouse, a credit shelter trust, and a separate trust for each child.

What is a “subtrust”?

You first say it’s an IRA, and then you refer to your “company.” Is it an IRA or an employer plan?

Occasionally an employer plan won’t let you have trusts, or multiple trusts, as beneficiaries. We had that happen twice, once with a local government plan, and once with a guild plan.

Some IRA custodians will only accept customized beneficiary designations from IRA owners who have IRAs or relationships above a certain size. That’s usually not an issue since IRA owners with small IRAs don’t usually create customized beneficiary designations.

If the IRA is large enough to warrant leaving it to the beneficiaries in trust rather than outright, and the custodian won’t accept the beneficiary designation, the lawyer should try to negotiate with the custodian. If that fails, the IRA owner should move the IRA to a friendlier custodian. We’ve been able to get customized beneficiary designations accepted by many financial institutions.

Permalink Submitted by Ben Meyer on Fri, 2017-05-05 05:00

If a trust named as a named as a beneficiary of an IRA has beneficiaries that are also trusts or subtrusts, the following regulation applies:

TR 1.401(a)(9)-4, Q&A-5(d). If the beneficiary of the trust named as beneficiary of the employee’s interest is another trust, the beneficiaries of the other trust will be treated as being designated as beneficiaries of the first trust, and thus, having been designated by the employee under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii), provided that the requirements of paragraph (b) of this A-5 are satisfied with respect to such other trust in addition to the trust named as beneficiary.

Permalink Submitted by John Boyle on Fri, 2017-05-05 15:02

So, to be clear, my company would be the IRA custodian. My company is saying you can’t name a subtrust of the trust as a beneficiary, only the trust. The client’s attorney is the one using the term “subtrust”, and he is the one saying that the IRS will not recognize the subtrusts as beneficiaries unless the wording is specifically worded properly (as I stated in my earlier post). The reason for doing i tthis way, according to the attorney, is to keep the money that would eventually go to the beneficiaries “creditor proof”. My probelem is that I don’t know who is right. The regulation that Benn posted (thank you Benn) helps me, but it sounds like it refers only to an empoyee retirement account rather than an IRA.

Permalink Submitted by Ben Meyer on Fri, 2017-05-05 16:19

The IRS wants the regulations of section 401 to apply to IRAs as well as to employee benefit plans, probably to avoid re-writing a very large volume of text. Therefore, for purposes of IRA accounts the word “employee” has the meaning of “IRA owner”.

TR 1.408-8, Q&A-1(b). For purposes of applying the required minimum distribution rules in §§ 1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6 for qualified plans, the IRA trustee, custodian, or issuer is treated as the plan administrator, and the IRA owner is substituted for the employee. (emphasis supplied.)

You might consider showing these rules to the attorney. It may be that the attorney is acting as a hyper stickler for detail in a situation where the rules alone are adequate. In most commercial IRA accounts the beneficiary designation is a small data entry field that can contain only a limited number of characters. A custom beneficiary designation consisting of a free-form textual narrative defining the beneficiaries is often not permitted. It is usually adequate to simply give the name and date of the trust in the beneficiary designation form, and leave all the details, including subtrusts, to the text in the trust document. If it is truly necesary to designate the trust beneficiary as a description of subtrusts, you may need to transfer the account to a more permissable IRA custodian.

Permalink Submitted by John Boyle on Fri, 2017-05-05 18:20

Your response really helped me. Thank you

Permalink Submitted by Bruce Steiner on Fri, 2017-05-05 19:28

If the original poster’s firm won’t accept the beneficiary designation, the lawyer should try to negotiate language that they’ll accept that will still accomplish the client’s objectives. If that’s not successful, the client should move the IRA to a friendlier custodian.

Benn is correct that beneficiary designation forms ususally don’t have much space. We usually fill in “see attached rider,” and attach a rider with the provisions we want. In the case of an IRA, we’ve always been able to work it out with the custodian.

It’s generally not sufficient to fill in the name and date of the trust. The client is often leaving the IRA to his/her issue, in separate trusts for their benefit. The trusts are usually created in the client’s Will.

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