Irrevocable Trust as Beneficiary of Inherited IRA - 1041 Questions

Forum|Forum|1 year ago
July 20, 2024
1 reply
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The family trust was the beneficiary of my mother's IRA. It became irrevocable when she passed. My brother and I are the beneficiaries of the irrevocable trust. The assets of the IRA will be distributed to the trust in approximately equal portions over the next 10 years. The trust will then pass those assets to me and my brother.

Is it necessary to complete a 1041 and two K-1s for the trust every year for the next 10 years?

If yes, is there a way to move the IRA assets from the irrevocable trust to my and my brother's traditional IRAs?

Thanks for your help.

Not A Product Question

Mike9241

Level 15

since state laws vary confer with an estate lawyer. In most cases a trustee can transfer an inherited IRA out of the trust to the trust beneficiary or beneficiaries without any negative tax consequences. But it done, the funds can't go into your IRA's because the funds are still subject to inherited IRA rules for nonspouse beneficiary.

Mike9241

dmertz

Level 15

There have been many cases the IRS has issued written determinations to particular taxpayers allowing the inherited IRA maintained for the benefit of the trust to be split and trustee-to-trustee transferred out of the trust to inherited IRAs for the benefit of the trust beneficiaries, subject to the provisions of the trust. However, many IRA custodians resist and it is sometimes necessary to transfer the IRA to an inherited IRA for the benefit of the trust at a different IRA custodian that is more accommodating. Absent such transfers the trust will need to receive the distributions and file Form 1041 and Schedules K-1 to pass the income through to the trust beneficiaries. The trust will need to remain open until all of the trust assets are distributed or transferred out of the trust.

Regardless, annual RMDs will be based on the age of the oldest trust beneficiary provided that the trust is qualified for look-through, which includes the requirement that the necessary documentation be provided to the particular IRA custodian by October 31 of the year following the year of death. The separate account rules that would allow each beneficiary to use their own age does not apply when a trust is the beneficiary that was listed by the participant. If the trust is not qualified for look-through, RMDs will be based on the beneficiary not being an individual. See Trust as beneficiary in IRS Pub 590-B.

For what it's worth, if the trustee of the trust has complete control over the distribution of the IRA or the income from the IRA, making the trust the beneficiary of the IRA likely served no purpose other than to complicate matters with respect to the IRA. It generally would have been better to directly name you and your brother as beneficiaries of the IRA, allowing the application of the separate account rules.

budsara1Author

Level 2

dmertz,

Thank you for your answers to my questions. I don't really want to file a 1041 for each of the next 10 years, so I'll look into transferring the IRA out of the trust.

You said "There have been many cases the IRS has issued written determinations to particular taxpayers allowing the inherited IRA maintained for the benefit of the trust to be split and trustee-to-trustee transferred out of the trust to inherited IRAs for the benefit of the trust beneficiaries.... ".

If available, please provide a reference that I can show the brokerage firm (just point me in the right direction, and I'll dig it up on the internet).