Inherited IRA in a Trust

[trust812]

My father who passed away has a Trust and I am the Trustee. The Trust inherited his IRA and the custodian, Charles Schwab, is setting up 3 Inherited IRA accounts, 1 account for my father’s main Trust and 2 accounts for the Beneficiaries which my father’s lawyer created Sub Trusts for. His lawyer obtained Tax ID’s for all 3 accounts. The Schwab Estate Specialist said that Schwab will put the inherited money in the main Trust account and I can transfer the funds to the Sub Trusts per the Trust document. For example I will be transferring money from “The John Smith Trust” to “The Jane Doe Trust established by The John Smith Trust”. Is the IRS usually notified of such a transfer and will there be any tax implications? I just want to make sure that the money doesn’t get inadvertently taxed. 

[dmertz · Accepted solution]

"Is the IRS usually notified of such a transfer and will there be any tax implications?"

No.  The funds are only permitted to be moved by nonreportable transfer, not by distribution and rollover.

[trust812]

Thanks for answering my question. There are 4 Beneficiaries named in the Trust. For 2 of those the lawyer created Sub Trusts. Using my original example the Trust document specifies when Jane Doe dies the other 3 Trust Beneficiaries inherit her IRA, each a 33% share. Would the money from her Sub Trust Inherited IRA account then be transferred to the main Trust Inherited IRA for 2 of the Beneficiaries and the Sub Trust Inherited IRA for the 3rd Beneficiary or would the money remain in her Sub Trust Inherited IRA for distribution to the remaining 3 Beneficiaries via K-1’s?

[dmertz]

The sub-trust should specify.  I doubt that it would go to the main trust.  RMDs for that share won't change, which, under the circumstances, would seem to need to be based on the oldest of the four.

[trust812]

@dmertz When money is moved from the main Inherited IRA Trust account to the 2 Inherited IRA Sub Trust accounts you said that it is a non reportable transfer. Does it mean that a 1099R is not created by Schwab who is the custodian? I am supposed to have a phone meeting with their Estate Specialist on Wednesday so I will ask them the question. I have been reading all sorts of horror stories on the internet about custodians screwing up.

[dmertz]

"Does it mean that a 1099R is not created by Schwab who is the custodian?"

Correct.  A Form 1099-R is only generated when there is a distribution.  A distribution from this inherited IRA is not permitted to be rolled over, so if there is a distribution there is no permissible way to get the finds back into any inherited IRA.  The movement of the funds from the original inherited IRA to another inherited IRA can only be done by trustee-to-trustee transfer which is not reportable, not by distribution and rollover.

[trust812]

@dmertz so I guess in my case the Trustee to Trustee transfer of some of the funds from the main Trust to the Sub Trusts is all done at Schwab since they are opening up 2 new Sub Trust Inherited IRA accounts and the transfer doesn’t have to be an account(s) at another custodian. 

[dmertz]

Correct.  Trustee-to-trustee can mean between accounts at the same trustee.

[trust812]

So what reporting is done by a custodian to the IRS when someone inherits an IRA? For example, let’s say Schwab puts $100,000 worth of different stocks into a new Inherited IRA account for the main Trust after the paperwork (application) is filled out upon a decedent’s death. Doesn’t the IRS have to know at a minimum about the new account in the main Trust? Not to mention the movement of money from this new account into 2 new Sub Trust Inherited IRA accounts. 

[dmertz]

There is no reporting to the IRS when an inherited IRA is moved.  A Form 5498 will be filed for the new account at the beginning of the following year, but it will only show the type of account and the year-end balance.  It must not show anything about the deposit of the funds into the new account.

[trust812]

@dmertz That’s interesting considering that the IRS likes transparency and doesn’t like secrets 🤣 

[dmertz]

A trustee-to-trustee transfer is equivalent to an investment change within the IRA.  The IRS has no interest in knowing about your investment changes within an IRA.

[trust812]

@dmertz  “A Form 5498 will be filed for the new account at the beginning of the following year, but it will only show the type of account and the year-end balance.”

Is the purpose of the form 5498 to let the IRS know that an IRA account was inherited? If not, how would they know to make sure that a Trustee is implementing the proper RMDs per the SECURE 2.0 Act?

[dmertz]

"Is the purpose of the form 5498 to let the IRS know that an IRA account was inherited?"

On a Form 5498 from an inherited IRA, both the decedent's name and the beneficiary's name are to be shown in the PARTICIPANT'S name field.

The RMD boxes might indicate that an RMD is required and the amount of the RMD, but IRA custodians are not required to complete this section on Forms 5498 for inherited IRAs.  It would typically take an audit by the IRS for the IRS to determine if insufficient RMDs have been taken.