Post-death IRA Trust Documentation Requirement

Eileen Sherr, CPA, CGMA, MT, Senior Manager – AICPA Tax Policy & Advocacy

March 23, 2018

paper clips

A special report reminds practitioners, taxpayers, and individual retirement account (IRA) custodians that specific documentation rules apply if a trust is the beneficiary of an IRA and the trust beneficiaries want to be “designated beneficiaries” for the required minimum distribution (RMD) rules (i.e., eligible to take RMDs over the life expectancy of the beneficiary).

Under Regs. Sec. 1.401(a)(9)-4 (Q and A) A-5 and A-6, the trustee must either provide the IRA custodian with a copy of the trust document or a summary of the trust provisions (with the final list of all beneficiaries of the trust) by Oct. 31 of the year following the death of the IRA owner. 

It is important for practitioners who prepare fiduciary income tax returns for IRA trusts to be aware and notify trustees of the post-death IRA trust documentation requirement. A failure of a trustee to satisfy the post-death IRA trust documentation requirement could prevent the trustee from using the life expectancy of the appropriate trust beneficiary in determining the RMDs that must be made from the deceased IRA owner’s account to the IRA trust.

If a trustee fails to satisfy the IRA trust documentation requirement promptly and is improperly using a stretch payment of a trust beneficiary, the trustee can have significant liabilities to the trust beneficiaries and the IRS. These include potential RMD penalty exposure and possible practitioner penalties from Circular 230.

There is no statute of limitations on the 50% RMD penalty unless Form 5329, Additional Taxes on Qualified Plans and Other Tax-Favored Accounts, is filed. Any practitioner who becomes aware of a lack of trust documentation provided to the IRA custodian before the Oct. 31 deadline should consider advising the trustee about it immediately. There is currently no method available under the IRS rules to remedy this oversight. 

Further, there is confusing language on page 12 of IRS Publication 590-B, Distributions from IRAs. It does not clearly detail the regulations documentation requirement and leaves the impression that the documentation requirement is up to the IRA custodian. Specifically, it states: “the trustee of trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or the trustee for details on the documentation required for a specific plan.” Practitioners are advised to follow the regulations.