Transferring an inherited IRA to a grantor trust

Submitted by John Laster on Thu, 2017-05-25 21:33

About eight years ago, six adult grandchildren inherited IRAs from their grandmother.

1. Each grandchild would now like to establish his or her own grantor trust into which each would like to transfer his or her inherited IRA. Each grantor trust would be for the sole benefit of its grantor-grandchild. The objective would be that one family member would act as trustee for all of the trusts. Unsurprisingly, everyone would like to do this in a way that does not accelerate all of the deferred income. I’ve read the relevant PLRs and it looks do-able. Has any of you done this (transfer an inherited IRA to a 100% grantor trust)? If so, I’d welcome your experiences, particularly if you encountered push-back from the IRA custodian.

2. In truth, the grandchildren would all like to have all of the grantor trusts sharing one account, all under the control of the same trustee, but I am assuming that would be a non-starter. If any of you thinks differently, I would value hearing your opinion.

Thank you!



Submitted by Alan - IRA critic on Thu, 2017-05-25 23:33

As far as I know, this is not possible. The only exception I am aware of arose out of PLR 2006 20025 when the IRS ruled that a disabled beneficiary could establish a Special Needs Trust (SNT) and it would be treated as a grantor trust. The transfer of the inherited IRA by the disabled beneficiary into the SNT was a non taxable transfer. Further, because this was a self settled trust, any remaining funds after the beneficiary’s death had to be paid to the govt agency funding the benefits. Transfers of inherited IRAs for non disabled beneficiaries do not qualify for this treatment as far as I know.  See http://www.lexology.com/library/detail.aspx?g=be3da633-ae03-44e0-b9b1-44f29811dcb0

Submitted by John Laster on Tue, 2017-05-30 11:22

Thank  you. I appreciate that an individual may not transfer his or her *own* IRA to a grantor trust without triggering the tax. But there is at least one other PLR, 2008-26008, that authorized such a transfer to a trust for a minor The minor, i believe was not disabled so this case was distinguishable from the rulings approving transfers to d4A trusts for persons with disability  Thank you for any additional thoughts.

Submitted by Bruce Steiner on Tue, 2017-05-30 16:00

  • There are a few rulings allowing the beneficiary of an inherited IRA to transfer the inherited IRA to a grantor trust.  
  • Everyone assumed that they were Medicaid payback trusts.  However, we can’t be sure that they were.  
  • I don’t know whether a financial institution would permit this without a ruling.  However, if they want to do this, they could ask around to see if they can find one that will permit this without a ruling.  
  • Note that private letter rulings are only binding on the IRS with respect to the taxpayers to whom they are issued.  If they’re at all concerned that the IRS might not allow this except in the Medicaid context, they might want to apply for their own rulings.  There would be some economy of scale if they were to all apply for rulings at the same time.

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