Not sure where to turn for advice

Submitted by Mary Smith on Sat, 2017-05-13 16:09

Hello. I am hoping you can give me some advice about an inherited IRA. My father passed away late in 2015 and left a sizeable IRA that is held in an Irrevocable Trust. The trust is the beneficiary of the IRA and my brother and I are named as equal beneficiaries of the trust. My brother passed away before my father, so his portion will be shared equally by his two children.

The trust has a clause that states that the trust ceases to exist after both of my parents have passed away (my mother passed away before my father). Therefore, I assume this means I can treat this simply as an IRA and not be concerned any longer with the trust factor.

I first talked to a representative from Schwab (where the IRA is held) about splitting this into three inherited IRAs. I was told I could convert it into one inherited IRA, but breaking it into three independent inherited IRAs couldn’t be done without taking a large financial hit. I did nothing further during that phone call but did call back soon after and spoke with another representative. This time I was told that they didn’t want to do anything with the account until I had consulted with an attorney or tax advisor. I tried doing this, consulting with two estate attorneys (one of whom was the attorney who wrote the trust many years ago) and a CPA. I was either told they didn’t know the best way to handle this or that they would “get right back to me” with more information, which they never did. Due to the fear of doing the wrong thing, I have not done anything with the account. It’s my understanding that by not taking the RMD in 2016 or setting up the inherited IRAs (if that was possible) by Dec. 31, 2016, that this option is no longer possible. Therefore, I would love some advice on what you could suggest as the best option for separating and disbursing the funds in this account. Furthermore, in order to distribute the funds according to the directives in the trust (in this case 50%-25%-25%), would it be best to do it all at once instead of over time? Thank you, in advance, for any insights.



Submitted by Alan - IRA critic on Sat, 2017-05-13 16:58

  • A very strange fact pattern. When diagnosing a situation like this, you must start at the beginning because each event or missed deadline sends the end result in a totally different direction.  Who is the trustee of this trust, or successor trustee as the case may be?
  • Most trusts are qualified for look through treatment, but one of the requirements is that the trust information be submitted to the IRA custodian no later than 10/31 of the year following the year of death. If that was not done the trust would not be qualified and would have to be treated as an estate would be. Was this done and is the trust definitely qualified for look through?
  • Trust “ceases to exist after both parents have passed”. I have no idea why that provision was inserted, or how it will be interpreted. This is probably why no one is getting back to you and could also render the question of whether the trust is qualified to be moot. What does Schwab say regarding whether the trust actually inherited this IRA or not? If the trust did not inherit it because it did not exist, then your father’s estate will likely be the default beneficiary under Schwab’s IRA agreement.  What was your father’s age when he passed? If he passed before his required beginning date and if either the trust was not qualified OR the trust was deemed terminated by your father’s death, then the 5 year rule will apply to your RMDs.
  • All this needs to be sorted out before you can even know what the IRS RMD requirements are. If the 5 year rule ends up applying, there are no distributions required for any particular year, but the entire IRA must be drained by 12/31/2020. If the trust was qualified and also inherited the IRA, then the age of the oldest trust beneficiary will determine the RMD divisor, whether individual inherited IRAs are eventually established or not.
  • I would also put some pressure on the attorney who drafted this trust. He should have an idea what was to happen at the time the trust ceased to exist. Are there other assets in the trust beside this IRA?

Submitted by Ben Meyer on Sat, 2017-05-13 18:33

  • When you say that the trust ceases to exist after both parents have passed, it probably means that a reasonable period of administration will follow to distribute the assets.  Nobody expects that the assets will be distributed immediately upon the last passing.  It only means that nothing new can be added to the trust corpus, and that the assets should be distributed to the beneficiaries, and administered prudently until that can be done.  Trust documents are sometimes skimpy in their description of this type of administration, but it only means that a reasonable procedure should be followed, including any requirements of state law.
  • If the trust document was not sent to the IRA custodian by October 31, 2016, the trust will now be considered as a non-qualified trust.  In this case, if the IRA owner passed before 4/1 of the year after reaching age 70 1/2, the account must be distributed within 5 years.  If on or after that date, the distribution period for all beneficiaries is determined by the remaining life expectancy of the decedent.  It be possible to split the IRA into separate inherited IRAs for the individual beneficiaries.  However, if the account has already been paid out or distributed to the trust and is no longer in an account titled as an IRA, no stretch can be taken.
  • There is also a likely deficiency in the distributions that were due in 2015 (possibly) and 2016.  If the decedeent was already taking RMDs, any remaining RMD for 2015 needs to be distributed.  Also, the RMD for 2016 needs to be distributed.  Form 5329 should be filed to request waiver of the penalties for late distributions of these amounts.  But if the 5-year rule is in effect, there would be no required distribution for 2016.

 

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