5 yr vs 10 yr inherited IRA (non spouse)
Dad died leaving a million dollars in a traditional IRA. Dad had started receiving his RMD before dying in 12/2020. Dad named his grantor trust as the 100% beneficiary. The trust names his Son as the sole beneficiary of the entire trust estate. Son wants to bypass the trust and have the IRA distributed directly to him as an inherited IRA instead of the trust. He believes if he can do this it would allow for a 10 year payout vs a 5 yr. payout thru the trust. The brokerage house holding the funds would allow it with an indemnification agreement and attorney opinion letter stating that the trust qualifies as a qualified see through trust under Treas Reg 1.401 (a)(9)-4.
Question 1: is the 5 yr. rule applicable in this scenario?
Question 2. Does this strategy allow one to extend the payout from 5 to 10 years.
thank you
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-12 18:16
If Dad was born before 7/1/1949 his RBD is 4/1 of the year following the year he reaches 70.5. If born after 6/30/1949 his RBD is 4/1 of the year following the year he reaches 72. If he was in his early 70s when he died, trustee needs to determine if he actually passed prior to or post his RBD. It is possible to distribute RMDs prior to the RBD. From here I will assume that he did pass post RBD.
The attorney requirement suggests that there is something about the trust that the brokerage is concerned with regarding qualification. The letter cannot be sent prior to the date the trust info is sent to the custodian since sending this info by 10/31/2021 is a requirement for qualification of the trust for look through.
If the trust is qualified, the 10 year rule applies unless the son qualifies as an eligible designated beneficiary (eg disabled on the DOD). If not qualified, the remaining life expectancy of the decedent applies. The 5 year rule never applies unless death is prior to the RBD.
If the trustee (son?) of the trust has the authority, he could assign the inherited IRA out of the trust to an inherited IRA of the son. This would erase any creditor protection the trust provides, so if son has any creditor issues, this would be a bad idea. Assignment out of the trust does not change the RMD calculation.