The Jeopardy of Leaving Your IRA to a Trust

Article excerpt

An owner of an Individual Retirement Account may provide that, in the event of his or her death, the balance in the account is to be distributed to a trust. The question then arises as to what method of distribution is to be utilized when the trust makes distributions to its beneficiaries.

The IRS, in PLR 9012009, has ruled that the method of distribution to the trust's beneficiary is based on the requirements of Prop. Reg. 1.401(a)(9). This proposed regulation, which deals with the required distributions from an IRA, sets forth certain trust-related requirements that must be met under the IRC if a trust is named as an IRA beneficiary.

The IRC provides that if an IRA owner dies before any distributions have been made to him, the entire interest in the account must be distributed within five years of his death. However, the IRC provides an exception if the IRA is payable to a designated beneficiary. Under such circumstances, the balance in the account may be distributed over the life expectancy of the designated beneficiary.

A problem arises in that the IRC specifies that only an individual may be a designated beneficiary. Consequently, a trust itself may not be the designated beneficiary and thus qualify for the extended distribution period, even if the trust is named as the IRA beneficiary.

However, the proposed regulations provide a measure of relief in that, if the distributee of the IRA account is a trust, then the beneficiaries of that trust are treated as designated beneficiaries for purposes of determining the distribution period, if the following four requirements are met:

* The trust is a valid trust under state law. …