IRA Subdivided into Trusts for Each Beneficiary Satisfied RMD Rules

A died in 2003, at age 68, not having reached her required beginning date under Sec. 401(a)(9)(C). She was survived by two daughters, B and C.

At her death, A owned IRA X, maintained with Company M. By means of a beneficiary designation, A had named trust T the beneficiary of X. T provided that the trust was revocable by A; thus, it became irrevocable on As death. D is Ts trustee. The trust is valid under state law. The custodian of X has been informed both of Ts terms and the beneficiarys identity. 

T provides that, at As death, the balance, including X, is to be given to B and C in equal shares. The language does not limit the payment of Bs share, but provides that Cs share be retained by T and held in subtrust Q, created for Cs benefit under T. B is the oldest potential beneficiary under T.

D proposes to divide X, by means of trustee-to-trustee transfers, into two distinct IRAs maintained in As namea transferee IRA for the benefit of B and the second for the benefit of Q, the subtrust created under T, for Cs benefit. Distributions from each of the transferee IRAs will be made over the life expectancy of B, Xs oldest beneficiary.

Analysis

If a plan participant (IRA holder) dies before the required beginning date, Sec. 401(a)(9)(B) generally provides that his or her plan or IRA interest must be distributed within five years after the death. However, if the plan participant or IRA holder dies with a designated beneficiary, distributions must (1) begin no later than one year after the holders date of death (or a later date, if provided in regulations) and (2) be made over the life of the beneficiary (or over a period not exceeding the beneficiarys life expectancy).

Regs. Sec. 1.401(a)(9), Q&A-3, generally provides that only individuals may be designated beneficiaries for purposes of Sec. 401(a)(9). However, Q&A-5 provides that beneficiaries of a trust with respect to the trusts interest in an employees benefit may be treated as designated beneficiaries if the following requirements are met:

1. The trust is valid under state law or would be but for the fact there is no corpus.

2. The trust is irrevocable or will, by its terms, become irrevocable on the employees death.

3. The trust beneficiaries who are beneficiaries with respect to the trusts interest in the employees benefit are identifiable from the trust instrument.

4. Relevant documentation has been timely provided to the plan administrator.

Neither the Code nor the final regulations under Sec. 401(a)(9) preclude the posthumous division of X into more than one IRA. However, Regs. Sec. 1.401(a)(9)-4, Q&A-5(c), does preclude separate account treatment for Sec. 401(a)(9) purposes when amounts pass through a trust.

In this case, absent Ts decision to transfer, by means of trustee-to-trustee transfers, each daughters one-half interest in As IRA X to her beneficiary IRA, as described above, distributions of As entire IRA would have to be made over Bs remaining life expectancy in accordance with Regs. Sec. 1.401(a)(9)-5, Q&A-5(c)(1). After the proposed trustee-to-trustee transfers, B and C will receive required distributions over Bs remaining life expectancy. Thus, the proposed trustee-to-trustee transfers will not affect either the timing or the amount of required minimum distributions (RMDs).

Thus, (1) X may be subdivided, by means of a series of trustee-to-trustee transfers, so that a separate IRA may be created in the name of A (deceased) for the benefit of B and (2) X may be subdivided, by means of a series of trustee-to trustee-transfers, so that a separate IRA may be created in the name of A (deceased) for the benefit of T, to hold and distribute said transferred IRA amounts for the benefit of C.

IRS Letter Ruling 200349009 (9/9/03)

Reflections: The regulations do not allow separate-account treatment for distributions of a deceaseds IRA through a trust; a separate account is not aggregated with other separate accounts to determine RMDs. However, in this case, establishment of separate IRAs through a trust for the benefit of the children-beneficiaries was allowed, because the distributions were determined as though they were aggregated (i.e., for the life expectancy of the oldest beneficiary).