IRA Trust Beneficiaries
Anyone or anything can be named as the beneficiary of an IRA, including trusts.
In simplest terms a trust is a written agreement between an individual (the grantor) and a trustee (generally, a bank or other financial institution which is granted trust powers under state and Federal law) to manage and distribute assets.
Trusts can be revocable or irrevocable. Revocable means that the grantor can change the terms of the trust at anytime. Irrevocable means that the terms of the trust can never be changed.
Revocable trusts are often called family or living trusts.
The benefit of naming a trust as the beneficiary of an IRA is highly debatable. In my experience the vast majority of individuals who have been forced to deal with a trust as an IRA beneficiary after the death of the accountholder would have preferred to have a root canal.
The most common problem is when a trust is named the primary beneficiary and a spouse survives the account owner. The surviving spouse cannot rollover or treat the account as his or her own without obtaining a private letter ruling from the IRS.
Non-spouse beneficiaries also face problems. If there are multiple trust beneficiaries, the oldest trust beneficiary must be used in a lifetime distribution calculation. Picture yourself as a 25 year old hipster. The other beneficiary of your father’s IRA is your 80 year old grandmother. You are required to use grandma's life expectancy.
Qualified and Non-Qualified Trusts
Under certain circumstances the oldest trust beneficiary can be used in calculating a required distribution. There are four requirements for a qualified trust:
• The trust is a valid trust under state law, or would be but for the fact that it is not funded.
• The trust is irrevocable or will, by its terms, become irrevocable upon the death of the accountholder.
• The beneficiaries are identifiable from the trust instrument.
• Proper documentation of the trust beneficiaries must be provided to the custodian or trustee.
Trusts that meet the four requirements are called “qualified trusts.” Trusts that do not meet the four requirements are called “non-qualified trusts.”
If a trust is a qualified trust, the beneficiaries of the trust are designated beneficiaries of the individual retirement account. If a trust is not a qualified trust, the account has no designated beneficiary.
Beneficiaries of Qualified Trusts
If a “young spouse” is the sole beneficiary of a qualified trust, the account owner’s required distribution is calculated using joint life.
If the sole beneficiary of a trust is not a “young spouse” the account owner’s required distribution is calculated using the uniform table.
Multiple beneficiaries of an IRA are treated as designated beneficiaries of individual retirement accounts. Lifetime distributions are calculated using the age of the oldest trust beneficiary in the calculation, unless the trust beneficiary's shares are set up as separate shares (this is unlikely--this would require the establishment of a separate trust for each trust beneficiary and would have to be part of the original trust agreement). A recent private letter ruling has allowed a trust to contain a provision to set up multiple trusts for multiple beneficiaries and for each trust beneficiary to use his or her life expectancy. Keep in mind that private letter rulings only apply to the applicant.
It is permissible for a trust to be the beneficiary of a qualified trust as long as both trusts meet the requirements for a qualified trust.
The individual retirement account owner can comply with the documentation requirement by providing a copy of the trust instrument or a list of the trust beneficiaries. This information must be provided, in the form of a certification to the custodian or trustee. For the owner, the deadline for providing the documentation is prior to taking a required distribution. This could be after the required beginning date.
Any changes in beneficiaries or to the trust document must be promptly reported to the custodian or trustee.
A copy of the trust document must be provided to the custodian or trustee upon demand.
In the case of distributions after death the following information must be provided to the custodian or trustee by October 31 of the year after the owner’s death.
• A final list of the beneficiaries of the trust (including contingent beneficiaries with a description of the conditions on their entitlement) as of September 30 of the year after death.
• Certify that, to the best of the trustee's knowledge the list is correct and complete and that the first three provisions of the qualified trust requirements are satisfied.
• Agree to provide a copy of the trust instrument to the plan administrator upon demand.
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