Trust as beneficiary of 403(b) – beneficiaries of trust want to roll into Inherited IRAs
The owner of a 403(b) passed away recently, and listed his trust as 100% beneficiary. The 4 beneficiaries of the trust would prefer to roll the 403(b) assets into Inherited IRAs in each of their names. There is no provision in the trust that would preclude them from doing so.
Assuming this is legally possible, what is the process to go through with the custodian to make this happen? Does the 403(b) need to go first to the trust and then to the 4 beneficiaries? If so, is there a RMD requirement from the trust and if so, based on what life expectancy?
Once the assets are in Inherited IRAs for the 4 beneficiaries (adult children of the deceased), are their RMDs subject to the 10-year rule? In this case, when does Year 1 begin?
A couple other details: the owner of the 403(b) died in 2023 at the age of 90 and his RMD for 2023 was completed. The assets are still in the 403(b) and the custodian has been extremely slow to respond.
Permalink Submitted by Alan - IRA critic on Tue, 2024-07-02 21:50
The process can be challenging. First, the 403b is not allowed to do a direct rollover to an inherited IRA unless the trust is qualified for look through. Part of that process is to submit the trust details to the 403b plan so they can determine if it is qualified. If it is qualified then a direct rollover to an inherited IRA is allowed by IRS rules. An inherited IRA must be established by the trustee with an IRA custodian that will cooperate with a request to assign the balance out of the trust to separate inherited IRAs at the same custodian for each trust beneficiary. Many IRA custodians will not cooperate with this request, and it may be challenging to find one up front that will commit to cooperating before the direct rollover is made to the trust.
The RMDs to the trust or to each inherited IRA is the same. It is based on the age of the oldest trust beneficiary, but the IRS has waived 2024 RMDs (first year of the 10 year rule). Due to this waiver, the 403b should be able to directly rollover the entire balance to the qualified trust without distributing a 2024 beneficiary RMD to the trust. But such annual RMDs will have to begin in 2025 (year 2 of the 10 year rule), and continue each year until 2033 when the entire remaining balance of the inherited IRAs must be distributed.
If the 403b administrator has been slow so far, that might not bode well with respect to their understanding of these rather complex requirements. The absolute deadline to submit the trust info to the 403b administrator is 10/31/2024 for the trust to be qualified and to enable a direct rollover to an inherited IRA, but the rollover to the inherited IRA can be done after 10/31 but needs to be completed prior to 12/31/2024 to avoid a 2025 beneficiary RMD from being distributed to the trust. If all this can be completed, there will be no need to distribute to the trust because all distributions could then be made to the individual inherited IRA beneficiaries and will be taxable to them.
If the end result was going to be that the trust was terminated, there was no sense naming the trust as the beneficiary of the 403b in the first place. The owner should have just listed the 4 beneficiaries individually and probably should have rolled the 403b to an IRA while still living.