An Ira Payable To A Trust – A Little Relief

If the beneficiary of an IRA is a trust then complicated rules apply to determine whether you can defer the payments of the IRA over the life expectancy of a designated beneficiary (“DB”). If your trust “fail safe” clause provides that, if all named beneficiaries are deceased then the trust proceeds would be paid to intestate heirs or a charity, then the issue is whether these “fail safe” beneficiaries would be counted in determining the life expectancy of a DB. If the “fail safe” beneficiaries are counted then IRA payments may be required to be paid over an accelerated time period which would shorten the tax free deferral and accelerate income tax. For example if a long lost uncle was the “fail safe” beneficiary, the payout out may have to be made over the life expectancy of someone 85 instead of a grandchild who is 15.

In Private Letter Ruling 201320021 (“PLR”), issued on February of 2013, an IRA owner was survived by her mother, her brother, and one child who was a minor. The decedent left her IRA to her child in trust and did not list a contingent beneficiary. If the child died without issue, then to whom would the balance of the trust be distributed? The IRS stated that because the child was the named beneficiary of the trust, the child’s life expectancy would be used to calculate the required distributions EVEN THOUGH the “fail safe” beneficiaries could have been the decedent’s mother or brother.

Advice:

The PLR is a helpful IRS result. Unfortunately, because the PLR is only binding on the person requesting the PLR you have no guaranty that this PLR will work in your client’s situation.