Magazine article The CPA Journal

Trusts as Beneficiaries of IRAs

Magazine article The CPA Journal

Trusts as Beneficiaries of IRAs

Article excerpt

Qualified pension plans are often rolled over into individual retirement accounts (IRAs) and therefore these accounts often constitute a substantial portion of an individual's estate. Accordingly, IRAs should be carefully considered as part of the overall estate plan.

The matter for discussion is how IRAs can be bequeathed to a trust, generally to either a qualified terminable interest trust (QTIP), in which the testator wants it to qualify for the marital deduction, or to a unified credit trust, which would be most common, where the testator does not have sufficient other assets in his or her own name to fully utilize the unified credit. It should be noted that IRAs, unlike qualified pension plans, are not subject to the spousal consent rule which requires the spouse to be named as the beneficiary of the plan unless the spouse consents otherwise. However, if the IRA resulted from a rollover of a qualified pension plan, spousal consent was required for the rollover.

Minimum Distribution Requirements

In planning for the disposition of IRA funds, it is important to consider the minimum distribution requirements of IRC Sec. 408(a)(6), as amended, which provides that rules "similar" to the distribution rules of Sec. 401(a)(9) (relating to required distributions from qualified plans) should apply. Proposed regulations have been issued under Sec. 401(a)(9), and are applicable to IRA distributions except where the Sec. 408(a)(6) proposed regulations are in conflict.

Generally, distributions from IRAs must commence no later than April 1 of the calendar yaear following the calendar year in which the individual reaches age 70-1/2 (the "required beginning date"). The interest of the individual can be paid in periodic installments over alternative periods based on the life (or expected life) of the individual, or the joint lives (or expected joint lives) of the individual and a "designated beneficiary."

If an employee dies before the distribution of his or her interest has begun, the entire interest generally must be distributed within five years after death. There are two exceptions to the foregoing rule, one that applies when the beneficiary is not the surviving spouse, and one that applies when the beneficiary is the surviving spouse. When the beneficiary is not the surviving spouse, the five-year rule does not apply if: 1) any portion of the employee's interest is payable to (or for the benefit of) a designated beneficiary; 2) such portion will be distributed over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such designated beneficiary); and 3) such distributions begin no later than one year after the date of the employee's death. Where the beneficiary is the surviving spouse, the same rules apply, except that distributions need not begin until the date on which the employee would have attained age 70-1/2.

If an employee dies after distributions from an IRA have commenced, the portion of his or her interest remaining at death must be distributed at least as rapidly as under the method of distribution being used as of date of death.

Is a Trust a "Designated Beneficiary"?

As mentioned, the interest of an IRA owner can be paid over alternative periods based on the life of the owner or the joint lives of the owner and a "designated beneficiary." Where a trust is the beneficiary of an IRA, there is an issue regarding whether the trust is a "designated beneficiary. …

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