Living trust named as beneficiary of father’s IRA, Mother has now passed away

Submitted by John Foster on Mon, 2023-08-28 21:09

A client and her sister are the successor trustees of the living trust of their parents. The father passed first and it appears from the IRA account title that the family trust was named the beneficiary of the IRA. The mother has now passed. The daughters are the beneficiary of the trust which is the owner of the inherited IRA. I understand the trust is also the beneficiary.

Both the father and mother were in their RMD years and the father’s death was before the Secure Act.

The custodian is saying-it cannot be split between the two daughters into separate inherited IRA’s, it needs to be cashed out and then the proceeds can be split between the two daughters (and not taken as distributions to the 2 parties).

Are they being given correct information, or is there anything to argue?



Submitted by Alan - IRA critic on Mon, 2023-08-28 21:52

  • Most likely, the custodian indication is incorrect. Unless the IRA agreement clearly states that trust inherited IRAs must be distributed in a lump sum, the custodian has no right to insist on such a distribution. 
  • A copy of the trust beneficiary provisions had to be provided to the custodian by 10/31 of the year following the year of father’s death, or the trust is not qualified for look through treatment. Was this done?
  • If not, the trust is not qualified and IRS RMD rules state that the IRA must be distributed over the remaining life expectancy of father starting in the year after father passed. But 2020 RMDs were waived.
  • If the trust is qualified, then the RMD distribution is based on the age of the oldest trust beneficiary if all trust beneficiaries are individuals. That most likely would be mother. Mother’s death would not change the RMD calculations.
  • If the successor trustees have the authority under the trust provisions to distribute the IRA out of the trust in the form of inherited IRAs for the beneficiaries and they choose to do so, there is no reason for the IRA Custodian to resist the request other than being misinformed. But doing so will not change the RMD calculation, it would just allow for separately managed inherited IRAs for each trust beneficiary outside the trust. The trust may then be terminated if the provisions allow.
  • In a few cases, the inherited IRA will have to be transferred to another custodian if the current custodian will not cooperate with an assignment request. By all means clearly state that no IRA distribution to the trust is authorized before these questions can be resolved.

Submitted by John Foster on Mon, 2023-08-28 23:13

Do I understand then correctly that when an individual inherits a previously inherited IRA that the original inherited IRA RMD rules for the first inheritor are what then continue to the second inheritor?

Submitted by Alan - IRA critic on Tue, 2023-08-29 02:38

Yes, that is generally the case. That said, if a pre Secure Act death after which the designated beneficiary is taking annual RMDs is followed by the death of that beneficiary post Secure, if the original owner passed prior to RBD the successor beneficiary becomes subject to the 10 year rule, but because the owner passed prior to RBD, the annual RMDs to the successor can stop. But they don’t stop if the owner passed post RBD. 

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