Trust As Beneficiary

Submitted by David Mitchell on Wed, 2022-12-07 20:17

I have a new client whose 8 year old son is the beneficiary of a Trust which is the beneficiary of a 401k plan. The plan participant died before their required beginning date. The plan participant died at age 50 in June, 2021. The 401k plan required an RMD in 2022, which was taken. The 401k plan requires the account to be fully liquidated within 5 years. If the client elects to roll the remaining balance out of the 401k plan into an IRA with the Trust as the owner and the Trust is a conduit Trust, can the remaining distributions be take over 9 more years? Or must the client stick to the original 5 year rule dictated by the 401k plan? Thank you.



Submitted by David Mertz on Wed, 2022-12-07 21:04

  • An inherited IRA that receives such a rollover is subject to the same RMD requirement as in the 401(k) from which the rollover was made.  The RMD requirement follows the rollover.
  • The question is why is this trust not qualified for look-through to make the son an Eligible Designated Beneficiary and avoid the 5-year rule?  Did the trustee of the trust fail to provide to the 401(k) plan by October 31, 2022 the trust documentation needed for the trust to be qualified for look-through?

Submitted by Alan - IRA critic on Wed, 2022-12-07 23:07

  • Its possible that this plan mandates the 5 year rule even if the trust is qualified, but that could be avoided with a direct rollover to an inherited IRA by the end of this month.  If done any later the inherited IRA will be subject to the plan’s 5 year rule as well. If the trust was not qualified, the 5 year rule cannot be avoided.
  • If the 5 year rule can be avoided and the trust is qualified, I think the child qualifies as an EDB and could take (very small) LE RMDs until age 21, then the 10 year rule kicks in for the trust or if the trust terminates for the child. 

Submitted by David Mertz on Thu, 2022-12-08 03:19

  • “… but that could be avoided with a direct rollover to an inherited IRA by the end of this month.”
  • Are you suggesting that the 401(k) plan might require full distribution within 5 years but not due to the statutory 5-year rule, meaning that LE RMDs could still be elected under the 401(k) plan?  If so, why would there be a deadline of year-end 2022 to do the direct rollover?  Under LE RMDs it seems that the 2022 RMD would need to be distributed before the remainder is directly rolled over.  I don’t see how there could be no RMD for 2022 under the 401(k) plan but there be a 2022 distribution required if rolled over to an inherited IRA.  I’ve always been under the impression that whatever restrictions there were under the plan transfer to the inherited IRA; I seem to recall reading that in some IRS guidance.

Submitted by Jay Wiedwald on Thu, 2022-12-08 04:23

Distributions taken while the child is subject to the Kiddie tax could be subject to a high tax rate. While that could be through the year he turns 23, delaying and moderating distributions is probably worth working toward.

Submitted by Alan - IRA critic on Thu, 2022-12-08 05:03

  • Comments regarding doing a direct rollover by the end of the year following death in order to establish LE RMDs in the inherited IRA were based on the following paragraph from QA 17 in Notice 2007-7:
  • “(2) Special rule. If, under paragraph (b) or (c) of Q&A-4 of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse designated beneficiary may determine the required minimum distribution under the plan using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. However, in order to use this rule, the required minimum distributions under the IRA to which the direct rollover is made must be determined under the life expectancy rule using the same designated beneficiary.”
  • However, it is not clear in the current Regs 1.401(a)(9)-3 whether this provision is still good as this section is difficult to follow. The Secure Act indicates that plans may still have various distribution restrictions but it seems that this option to avoid the 5 year rule should still be available to EDBs at least. Need more time on this one.

Submitted by David Mertz on Thu, 2022-12-08 13:19

  • Thanks.  I was remembering Q&A-19 of the same notice (IRS Notice 2007-7) which says, in part, “The rules for determining the required minimum distributions under the plan with respect to the non-spouse beneficiary also apply under the IRA. Thus, if the employee dies before his or her required beginning date and the 5-year rule in § 401(a)(9)(B)(ii) applied to the nonspouse designated beneficiary under the plan making the direct rollover, the 5-year rule applies for purposes of determining required minimum distributions under the IRA.”  That seems a bit contradictory, but I guess the two together mean that the special rule applies when plan rules dictate that the 5-year rule applies but the beneficiary would be permitted to select LE RMDs absent the plan rule.
  • That still leaves open the question about how to handle the 2022 LE RMD if the account is directly rolled over by the end of 2022.  Does a 2022 LE RMD need to be distributed before rolling over the remainder, after rolling over the entire amount or is there no 2022 LE RMD?

Submitted by Alan - IRA critic on Thu, 2022-12-08 16:46

  • There is a 2022 RMD, but It appears that use of the special rule should result in the beneficiary requesting the LE distribution from the QRP for 2022 before the balance is directly rolled over. The 2022 LE RMD would not be an eligible rollover distribution under LE. As a matter of practice however, the 2022 RMD is probably being withdrawn from the inherited IRA unless the QRP recognizes that the beneficiary is applying the special rule.
  • In the original post it was stated that the plan required a 2022 RMD, which was distributed. That does not square with the 5 year rule and there was no delayed year of death RMD. It’s not clear what plan provisions the administrator is following. Time is running short to complete the direct rollover or the inherited IRA will fall under the 5 year rule. 

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