Qualified trust dissolves before beneficiary designation date
IRA Owner dies on June 1st, 2021, leaving her account to her revocable living trust. The two sole beneficiaries of this trust are her two siblings, Brother and Sister. Both siblings are EDBs under the “not more than 10 years younger” exception. Assume for the sake of simplicity that this IRA is the only asset inside the trust.
If this trust dissolves prior to the beneficiary designation date of September 30th, 2022, is it allowable to let each sibling receive their 50% share of the trust assets as a beneficiary IRA FBO their own respective name, *AND* stretch on their own respective life expectancies? Or are we still required to use the oldest bene’s L.E. for all stretching?
In short, I’m wondering if dissolving the trust and breaking this up before the BDD allows us let each sibling stretch off their own L.E.?
Permalink Submitted by Alan - IRA critic on Mon, 2021-06-14 20:48
I don’t think so. The following link to a recent PLR clarifies that this is not possible for an estate or NQ trust since such entities could not be treated as designated beneficiaries in the first place. Assignment out of the estate or NQ trust does not change this. Your question however involves a trust that we can assume will meet the requirements for look through including providing a copy to the IRA custodian by 10/31 even if such trust had been closed prior to that date. Separate account rules do not apply to trust beneficiaries, so your question is whether distribution by tax free transfer to inherited IRAs can result in those 2 beneficiaries being treated as separate EDBs and reinstating the separate account rules. The following link to a recent PLR appears to suggest not. While for most of the article it was not clear if the separate inherited IRAs for the 5 trust beneficiaries under their SSNs were still titled as trust beneficiaries, the use of individual SSNs and a later statement near the end of the article refers to “closing the trust”, which I think is what you envisioned. It also states that while the death in the refererenced PLR was pre Secure, post Secure deaths such as your example would not change this for multiple EDB trust beneficiaries. I think we could also conclude that if the older of your 2 beneficiaries disclaimed their interest in the trust, then the remaining EDB beneficiary could use their longer LE, disclaimers being treated differently than just trust closure and assignment.
IRA Allowed to Be Transferred Out of Trust (wealthmanagement.com)
Granted, the above PLR was not focused on your question, and I could locate no more specific or clearer guidance.
Permalink Submitted by Robert Vashko on Mon, 2021-06-14 21:01
Thanks for the link. What if the older Sibling in my hypo was an EDB and the other Sibling was not? Could the trust stretch the whole IRA off the EDB’s LE? Or would the trust have to stick with 10-year? Or could the trust split it and let the EDB stretch and the non-EDB do 10-year?I remember SECURE discussing this when one of the trust beneficiaries was an EDB by virtue of disability or chronic illness (i.e., busting the EDB’s share into a separate subtrust so they could stretch off their share), but not sure if that treatment was allowable for other EDBs (like the “not-less-than-10-years-younger” EDB).
Permalink Submitted by Alan - IRA critic on Mon, 2021-06-14 22:15
Per Michael Kitces blog: “One critical aspect of Discretionary Trusts is that, when determining the applicable life (or lives) to use to determine the post-death distribution rules, (i.e., whether the trust will be considered an Eligible Designated Beneficiary and eligible to ‘stretch’, or a Non-Eligible Designated Beneficiary subject to the 10-Year Rule), the lives of all current income beneficiaries and (potential) future beneficiaries must be considered, and then must use the least favorable distribution schedule that would apply to any single beneficiary if they were named directly. Given this requirement, with only a narrow exception (for Applicable Multi-Beneficiary Trusts, discussed further, below), it would appear that all Discretionary Trusts would be Non-Eligible Designated Beneficiaries, subject to the 10-Year Rule. Because at some point in line of beneficiaries, there’s almost certainly going to at least one of them that’s not an Eligible Designated Beneficiary, right?”
Natalie Choate concurs: “Generally, without issuance of new regulations, an accumulation trust cannot qualify for EDB treatment, even if the primary or life beneficiary of the trust is an EDB, because if the EDB is not the sole designated beneficiary of the participant EDB treatment does not apply. For explanation of this harsh conclusion, see “Practitioner’s Wishlist” below. Exception: An accumulation trust for a disabled or chronically ill beneficiary is the exception to the rule—it can qualify for EDB treatment even though the disabled/chronically ill individual, as life beneficiary of the accumulation trust, is not deemed to be the “sole” beneficiary of the retirement plan. With the exception of certain trusts for the sole life benefit of disabled or chronically ill beneficiaries, an accumulation trust that is a see-through trust must take distribution of the entire plan balance within 10 years after the participant’s death.”
So it seems like the “multi beneficiary trust” for the chronically ill or disabled helps other non EDB beneficiaries, while other discretionary trusts with EDB and non EDB beneficiaries hurts the EDB by inflicting the 10 year rule. So for these other trusts, seems like if the stretch is an issue, separate trusts for each beneficiary would be needed.
Of course, all this is interpretation and could be changed by the actual IRS Regs.