Re-registration of an Inherited IRA owned by a Trust

Submitted by Jeffrey Vahanian on Tue, 2019-01-22 17:06

One of our IRA clients designated her Testamentary Trust as beneficiary.
Upon her passing, as instructed, an Inherited IRA FBO Trust was established under the Trust’s Tax ID number.
The Trust is also the beneficiary of this Inherited IRA.
There is one individual who is the beneficiary of the Trust, so his life will be used to calculate the RMD.
The Trust terminates at beneficiary’s age 60. However, the Trustee has the right to terminate the Trust at any time, and wants to invoke that power now.

The intention is to re-register the inherited IRA FBO the Trust to an inherited IRA FBO the individual who is the sole beneficiary of the Trust because it is a see-thru Trust.

Our custodian is insisting this cannot be done and the only way they will pass the assets is via a full, taxable distribution of the inherited IRA. Thus the beneficiary of the trust would receive a fraction of what was intended.

Has anyone else come across this? We feel it is a bigger issue than just this case, as several estate planning attorneys have instructed our clients to name Trusts as IRA beneficiaries.

Thank you



Submitted by Alan - IRA critic on Tue, 2019-01-22 17:50

  • You must be working with a small inexperienced custodian or untrained staff if the custodian is larger. The IRS has issued several private letter rulings permitting the trustee of a trust or the exceutor of an estate to “assign” an inherited IRA to the respective beneficiaries of the applicable instrument. Often the last couple of decades the number of IRA custodians that resist has been diminishing, but there are still some out there. Some of these are even asking the trustee to apply for THEIR OWN letter ruling.  The best solution is obviously to elevate the question to senior level staff, but Plan B is to transfer the inherited IRA account to a larger more professional custodian who has agreed beforehand to allow assignment to the beneficiaries.
  • Part of the problem is that IRA custodians wish to avoid complications and litigation arising out of estates or trusts, or having to set up multiple inherited IRA accounts which are wasting assets because no new contributions can be made, RMDs apply, and determining the RMD amount is not always easy.  Many of these custodians do not wish to reveal the real reason for their policy, and few clearly reveal their policy in writing in the IRA contract.  In seeking a new custodian via direct transfer, it may help if the beneficiary already has accounts there and perhaps some leverage. With only one beneficiary in your situation, that fact may be helpful in getting this resolved. 
  • If a lump sum is distributed to the trust, the trust can pass through the income on a K 1, however the beneficiary will lose whatever stretch is left and will have a large taxable income spike which may well increase the beneficiary’s marginal rate in the distribution year. 

Submitted by Bruce Steiner on Sat, 2019-01-26 22:54

  • Use Alan’s Plan B.  Have the trustee move the IRA to a friendlier custodian, preferably the one where the beneficiary wants to maintain the inherited IRA.  This should be a routine matter.
  • Bruce Steiner

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