Trust Set As Beneficiary of IRA & Two Minors Are the Beneficiaries of Trust

[peggysioux]

I have been researching trusts/IRA's to determine whose life expectancy would be used in determining the RMD for the IRA. Grandma set up the trust as the beneficiary for her IRA and her two grandchildren are the beneficiaries of the trust. The trust is to distribute all shares created for grandchildren at age 40 and trustee can use trust proceeds to the benefit of children prior to their reaching 40. In my research I found that in order for the trust to be considered a designated beneficiary under the Code Sec. 401 (a)(9) regulations "the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of Reg. 1.401(a)(9)-4, A-1 from the trust instrument." The trust states that if one of the grandchildren were to pass away then the remaining shares would transfer to the remaining grandchild. If both children were to pass than the trust states the remaining shares would be disbursed to the last remaining grandchild's issue in equal shares according to the provisions of Probate Code section 246.

Based on my research it seems that being both children are under age 18, I have to look to the children's mother as contingent beneficiary and being the mother is the oldest of the beneficiaries, I would use her age in determining the RMD.

Or being the trust states that if both children pass, the trust directs us to Probate Code section 246 which states

"(a) Where a will, trust, or other instrument calls for property to be distributed or taken "in the manner provided in
Section 246 of the Probate Code," the property to be distributed shall be divided into as many equal shares as there are living children of the designated ancestor, if any, and deceased children who leave issue then living. Each living child of the designated ancestor is allocated one share, and the share of each deceased child who leaves issue then living is divided in the same manner."

Does that mean that the funds would be left to the grandchild's estate, which would then mean there is no identifiable beneficiary so the IRA will need to be distributed within five years of the grandmother's death.

Can someone with far more expertise in trusts clarify for me.

Much appreciated.

Peggy Sioux

[Burke]

I have the exact same situation pending, only taxpayer who was receiving RMD's has died. You don't say how old Grandma is or if she is already receiving RMD's from this IRA. It is my opinion that this IRA (upon GM's death) would be divided into two equal shares so that it could be administered properly. The minor beneficiaries will reach age 40 (presumably -- unless they are twins) in different years, they may have different needs addressed in how distributions are made -- i.e, for education -- at different times. If this is not done, the trust tax return becomes a nightmare. Trust me, I have one where this was not done and it is not even an IRA. From the information provided, it appears the mother is NOT a beneficiary, so her age would have nothing to do with it. She may be the trustee? If so, she would only receive distributions on the minor childrens' behalf, but for their benefit. To answer your last question, it appears the trust specifically identifies the beneficiaries of the IRA, so the five-year payout would not come into play, IMO.

[peggysioux]

Trust Set As Beneficiary of IRA & Two Minors Are the Beneficiaries of Trust

Thank you Burke for your valuable input. The grandmother was 68 when she passed so she was not yet drawing her RMD. There is another issue I am confused about as well that I was hoping you could respond. The grandmother died in 2009 and the funds were to be split equally through the trust between the two grandchildren. It appears that there were two separate IRA's for the grandchildren set up, but not all the funds were transferred into the grandchildren's IRA's. A portion is in an IRA named "(name of trustee)Trustee of Beneficiary to Grandmother". In 2010 funds were withdrawn from the Trustee IRA account, in 2011 no funds were withdrawn, and in 2012 funds were withdrawn. There is approximately $20,000 remaining in that IRA. Now in December of 2013, the trustee of the IRA account advised the trustee of the trust to check with her tax person to determine the RMD of that IRA. Shouldn't the RMD already have been determined by the year after the grandmother's death?

Second question: Being there is an IRA that did not get split into the grandchildren's names, would I use the oldest grandchild's age to determine the RMD?

Third question: What are the ramifications of the RMD not being timely set up and distributions not being paid out in 2011?

Thank you again for any help you can provide.

Peggy Sioux

[mactoolsix]

Peggy,

Since the death occurred prior to any RMD, and the beneficiary was not an individual, all IRA funds must be distributed within five years.

http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230770

Then follow the trust instructions as closely as possible - two separate accounts, distributable at age 40 for each grandchild etc. . .

How did the grandchildren make contributions to an IRA without earned income? Since the grandchildren were not direct beneficiaries, I don't see how an "inherited IRA" could be allowed. I think these contributions need to be removed.

The second IRA (that has not been split) also follows the five year rule.
No distributions are required for the first four years after the death. The entire IRA must be distributed by the end of the fifth year.

Mike

[peggysioux]

Trust Set As Beneficiary of IRA & Two Minors Are the Beneficiaries of Trust

In my research of trusts being the beneficiary of an IRA, it states that there is an exception to the general rule that the designated beneficiary must be an individual as long as the following four requirements are met:

1. The trust must be valid under state law;
2. The trust must be irrevocable or become irrevocable upon the IRA owner's death;
3. The trust beneficiaries must be identifiable from the trust instrument; and
4. Proper documentation must be provided to the IRA custodian by October 31 of the year following the IRA owner's death.

Being the grandchildren were identifiable from the trust instrument (there are some issues that I found you had to be careful of through my research) and the other three points were met as well, the IRA's were able to be set up for the grandchildren; but I had the additional questions as noted in my second post. Would appreciate anyone's additional input for the answers to my questions.

Thank you Mike for your input.

Peggy Sioux

[mactoolsix]

After posting, I decided to look a bit further and found your exact exception to the individual beneficiary rule!

http://www.investopedia.com/articles/retirement/04/081804.asp

Sorry for the mis-information - that's why I love this forum . . . I learn more every day.

Mike

[Burke]

1. I am going to assume that the proper trust documentation has been submitted to the IRA custodian(s) since you indicate accounts have already been set up.

2. I have no idea why 3 accounts were set up; however, to determine the RMD, all accounts must be aggregated if they contain IRA funds and the age of the oldest beneficiary used to determine the RMD for the year, as I read the regs. Was this done for prior withdrawals? Did the trust document direct that there was to be a 3rd account? What TIN is on it? And on the other two?

3. There are 5 qualifications for the designated beneficiary treatment where a trust is named, and the fifth one troubles me. You must look to the current benes and the remaindermen as well, and it looks to me like an estate could potentially be involved, since obviously these minor children do not yet have children of their own that can be identified.

4. What was done with the prior withdrawals and how were they reported to the IRS?

A couple of good reference sources are available from Edward Jones and Morgan Stanley on Trusts as IRA Beneficiary. They are available on Google. Hopefully, a lawyer set up this trust document. You may have to refer some questions to him.

[peggysioux]

Trust Set As Beneficiary of IRA & Two Minors Are the Beneficiaries of Trust

Burke, in answer to your questions:

1. Trust document was provided to custodian of IRA.

2. The custodian of the IRA handled the distributions for 2010 through 2012 and 2010 and 2012 there were larger amounts withdrawn so I guess the custodian thought there would be no problem in meeting an RMD; however in 2011 no distributions were made. I am very confused with how the custodian has handled this and why he is just now asking the taxpayer to check with her tax person to determine the RMD. I asked the client what had changed this year that he was now asking the question and he told her that in the previous years there were large distributions. However, in 2011 that is not true. Do you have any advice on how I should handle?? I ask the client questions and she just says she doesn't know and she will ask the financial person which is the custodian of the IRA.

3. Regarding the contingent beneficiaries and the possibility of the estate being a contingent beneficiary, I had that same concern as I noted in my first posting. However, being the trust states that if one grandchild dies, the remaining funds would go to the other child, I was unsure if you needed to look beyond both children. So based on your comments, you do think that one would be required to look beyond both children and being the trust states if both children die than the trust funds would be disbursed to their issues, then we are back to the trust has an estate as a beneficiary?

4. The previous withdrawls for 2010 were handled through the trust. In 2012 the children's IRA withdrawls were under their SS # and placed on their individual tax returns. The withdrawl from the 3rd IRA is under the Trust ID and was handled through the trust and shown as disbursed to the children via a K-1.

An attorney did set up the trust originally in the early 1990's and the grandmother made some changes on her own in 2007.

[Burke]

Custodians want out of the business of determining RMD's to avoid liabilities, so they are passing on that obligation to the IRA recipient and this case is a prime example of why. And as the law stands, the recipient, bene or trustee IS the one on whom that responsibility lies. You can expect this to come up every year.

I don't have the trust document, but from what you say, the bene was the trust for the entire IRA. Not sure why 3 different accounts are set up with both Trust EIN and bene's SSN's. Does the trust document indicate that distributions are to be passed through to the bene's? (There is such a thing as a Conduit IRA in which this is done.)

You can figure out what the 2011 distribution should have been; was the 2012 enough to cover both years? If so, I would let it go unless IRS gets involved. You could probably appeal any penalties and they would concede. If not, and you haven't heard anything by now, you probably won't.

I have been mulling over the "estate as beneficiary" thing, and when you think about it, every single individual beneficiary arrangement you can come up with has the potential of being paid to an estate eventually, if all death contingencies occur. That simply cannot be avoided, and I do not think the regs intended to eliminate the qualified trust designation with that wording, unless an estate is actually named as a primary bene to begin with. That's my opinion, but I am no lawyer. It just makes logical sense.

[peggysioux]

Trust Set As Beneficiary of IRA & Two Minors Are the Beneficiaries of Trust

Regarding the "estate as beneficiary", with the wording of the trust that the two grandchildren are the beneficiaries of the trust and if either of the grandchildren passes than the remaining trust funds will be left in trust for the remaining grandchild and if both were to pass then the trust funds would be left to grandchildren's issues - my take on it is that the grandchildren are the beneficiaries and each grandchild is the "contingent beneficiary" of the other therefore the issues are the "successor beneficiaries". In my research, I found that the contingent beneficiaries needed to be looked to to determine RMD, but the successor beneficiaries did not. Hopefully I am applying correctly.

The trust document states that at the grandmother's death, all assets in the trust were to be split into equal shares for the two grandchildren and remain in sub-trust until the children reached age 40. The trustee could use funds for the needs of the children at her discretion. The mother (trustee) is stating that they are still working on splitting everything so that is why there is still an IRA under the trust ID #. No where in the trust does it state that the yearly RMD's should be distributed to beneficiaries, but it does state that the funds of the trust were to used only for the needs of the children.

[Burke]

The trust document states that at the grandmother's death, all assets in the trust were to be split into equal shares for the two grandchildren and remain in sub-trust until the children reached age 40.

Then why isn't the Trust EIN on those accounts as well?