Trust as IRA Beneficiary/ Creation of Separate IRA-BDA’s
Under normal circumstances, because of the Secure Act, we are naming the spouse and/or children as primary and/or contingent beneficiaries of retirement plans (IRAs, 401ks etc.). There are times where the retirement account will flow through the Living Trust and with special verbiage in the Living Trust document, we are attempting to have IRA BDAs created.
The special verbiage is:
[To establish and to direct, pursuant to the terms of any employee benefit plan, individual retirement plan, or insurance contract, the creation of qualified “designated beneficiary” accounts as that term is used in the Internal Revenue Code section 401(a)(9) (also known as IRA-BDA, IRA Beneficiary Account or Inherited IRA); and to elect, pursuant to the terms of any employee benefit plan, individual retirement plan, or insurance contract, the mode of distribution of the proceeds thereof, and no adjustment shall be made in the interests of the beneficiaries to compensate for the effect of the election.]
Our Custodian/ Broker-Dealer claims they cannot accept special trust language as a means to transfer assets directly from a client’s IRA account to individuals if the IRA paperwork does not identify such individuals as beneficiaries of the account. They also tell us that if a trust is the named beneficiary of a retirement account, the retirement account must be liquidated, not allowing the option to stretch the IRA over a 10-year period.
Our Broker-Dealer further goes on to specify that, “in regards to the section referenced by the families, the IRS has specifically stated a designated beneficiary is the individual who is designated as a beneficiary under the plan. The Trust is identified as the beneficiary within plan paperwork. Further, the IRS has stated the passing of an employee’s interest under Will or otherwise under applicable state law (i.e. under a Trust instrument) will not make that individual a designated beneficiary under the section cited (please see below). In order to override the beneficiary designation paperwork and transfer assets directly from the client’s account to beneficiaries identified under a Trust, we require either a private letter ruling or a court order instructing us to do so.”
We would like to see what your opinion is because in your workshops, you had mentioned there are ways to get the 10-year stretch through a living trust, but we are unable to convince our BD or custodian otherwise.
Permalink Submitted by Alan - IRA critic on Mon, 2021-12-27 22:11
You are dealing with the wrong IRA custodian. It appears that they are not willing to allow the trustee of a trust or the executor of an estate IRA beneficiary to assign the IRA out of the inheriting entity to the beneficiaries of that entity. Further, they will not even retain the inherited IRA for the 10 year Secure Act period even when the trust is qualified for look through under the IRS Regs, rather they will distribute a lump sum that will spike the current marginal rates of the recipients.
It is not possible to determine if the custodian’s policy here is aggravated by the special verbiage included in the trust. This verbiage may be considered by the custodian as pre empting their policy of declining assignments from the trust trustee, whether written or back room operating procedures. Therefore, if their stance was to be restrictive, the special verbiage flushes out that intent perhaps prior the the plan owner’s death.
The term “designated beneficiary” in the special verbiage may be at least a partial problem. I think what is desired here are “separate accounts”, where each beneficiary has their own inherited IRA .
The custodian may not fully understand the difference between a trust qualified for look through and one that is not. Those that are not are always subject to the 5 year rule if death is prior to RBD, or the remaining LE of the decedent if death was on or after RBD. But even for a non qualified trust beneficiary, the trustee should be able to assign the IRA out of the trust to the individual trust beneficiaries if the trust language permits it. Most qualified trusts will be subject to the 10 year rule, but pending final IRS Regs on Secure some EDB beneficiaries, particularly disabled beneficiaries may qualify for LE RMDs instead.
Permalink Submitted by Bruce Steiner on Mon, 2021-12-27 22:25
It rarely makes sense to run an IRA through a revocable trust, since revocable trusts merely collect and distribute assets. It would generally make more sense to name the beneficiaries of the revocable trust, or trusts for their benefit, as the beneficiaries or contingent beneficiaries of the IRA.
What does the quoted language accomplish?
Nevertheless, I agree with Alan that if this custodian is being difficult the IRA owner should consider moving the IRA to a friendlier custodian.
The IRA owner may also want to consult with competent tax/estates counsel.
Bruce Steiner
Permalink Submitted by Todd Swanson on Tue, 2022-02-08 17:35
If the trust is named as beneficiary of an IRA, does the trust have to distribute the trust assets in the year the IRA is deposited to the trust, in a lump sum? This would cause an increase in taxable income to the beneficiary of the trust.
Permalink Submitted by Alan - IRA critic on Tue, 2022-02-08 20:08
No, it depends on the trust and/or trustee’s discretion if granted. Typically, the IRA is not distributed to the trust until RMDs are due to defer taxes. If the IRA is fully distributed, the trust will owe taxes at the higher trust rates if the proceeds are accumulated in trust or if passed through to the trust beneficiaries, they will have to report the taxable income on their personal returns, and those rates are usually lower than those of the trust.