IRA with Trust as Beneficiary – Look through with issues
IRA owner dies and has trust listed as the IRA Beneficiary. It is a look through trust and the named beneficiaries are the decedents two children. However, both children pre-deceased the decedent. The trust then simply states “any nieces/nephews” of those children. It doesn’t specifically identify them and there are about 15 of them. The custodian is saying that the only options are for the trustee to liquidate the IRA all at once, pay the taxes and then distribute the leftover proceeds to the 15 beneficiaries, or setup an inherited IRA within the trust and take the money out over 10 years. The 15 beneficiaries barely know each other. So this isn’t a big loving family but largely strangers and the trustee doesn’t want to have to manage 10 years of inherited IRA distributions with an Inherited Trust IRA.
Are these truly the only options in this scenario? No way to have the 15 successor beneficiaries all have their own Inherited IRA and close out the trust right away? If we have the Inherited Trust IRA and then do the 10 year rule (say $1M over 10 years with no growth so $100K a year) does that distribution pay trust tax rates anyway? So no benefit in waiting 10 years and better to just distribute immediately if 15 inherited IRAs aren’t possible?
Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2025-07-01 10:29
This is a typical reaction from an IRA custodian that does not view inherited IRAs as attractive accounts, and the more beneficiaries there are, the less likely the custodian will be to accept assignment of the inherited IRA out of the trust or estate to separate inherited IRA accounts. It’s not clear if this custodian always resists assignments, or they pick and choose depending on the situation. There is no solution other than to locate another custodian that will cooperate with assignment, and then directly transfer the inherited IRA to the new custodian.
While the custodian would prefer option 1 (total distribution), by offering option 2 they also avoid getting involved with 15 separate inherited IRAs and can make a single distribution to the trust each year and the burden beyond that falls to the trustee of the trust, who likely does not want this burden either for 10 years without charging an appropriate trustee fee.
If distributions to the trust are passed through annually to each beneficiary on a 1041/K1, the trust can take a deduction and each beneficiary will pay the taxes at their personal tax rates.
I am assuming that with sufficient investigation, all these nieces and nephews will be identifiable, which is a requirement for the trust to qualify for look through. If the decedent passed post RBD, the 10 year rule would apply but with annual RMDs based on the oldest of the 15 trust beneficiaries.
Because there are 15 beneficiaries, in the event of a total distribution, each would receive under 70,000 which is probably not high enough to warrant attempting to spread distributions over several years. If I were the trustee I would opt for the total distribution.