Tax Tips
A Trust as Your Beneficiary of Your IRA- November 2000
Richard Scrivanich - Partner
Here's an estate and financial planning technique to consider: instead of naming an individual or individuals as beneficiaries to an IRA, establish a trust and have it become the beneficiary. If a trust satisfies the requirements of proposed regulations section 1.401(a)(9)-1, Q & As 5 though 7, the beneficiaries of the trust will be treated as the designated beneficiaries of the IRA and their life expectancies will be used to determine the required minimum distributions. This technique is valuable for taxpayers who would like to leave their IRAs to their children but the children may not be ready to handle the funds. With a trust, taxpayers can maximize the tax-deferral period without having to leave the IRA assets directly to a child. This technique can work even if you want to divide one IRA among several children.
In Letter Ruling 200008044, the IRS said that a trust with an inherited IRA, could divide the IRA into four separate and equal IRAs, and form trusts with separate trustees without creating a taxable event.
The facts of the ruling were as follows: A taxpayer had four children; he was survived by three and by a grandchild of the fourth. The taxpayer named a trust as the beneficiary of his IRA, and the IRA trust provided that upon the taxpayer's death, the trust's interest in the IRA was to be divided into four equal parts for the benefit of the three children and one grandchild.
When the taxpayer reached 70 ½, he began receiving the minimum distribution based on the joint-life and last-survivor expectancy of him and his eldest child. Upon the death of the taxpayer, the trustees of the trust sought to divide it into four separate accounts. This would give each trustee greater control and more flexibility in investing the funds allocated to a particular beneficiary.
The IRS said dividing the IRA would not affect its tax-exempt status. The Service also concluded that any distributions from the four IRAs would not be subject to the 10% excise tax under IRC section 72(t)(1).
Although letter rulings only apply to the specific facts of the case, they can be useful in demonstrating the IRS position on a particular issue. This letter ruling provides a new way to use your IRA as part of your overall estate and financial planning, without running into problems with the IRS.
If you have any questions concerning IRA's or any other tax matter, please feel free to give me a call at (562) 698-9891.
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