Irrevocable Trust as Beneficiary of Inherited IRA - 1041 Questions

[budsara1]

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.

[Mike9241]

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.

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[dmertz]

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.

[budsara1]

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).

[budsara1]

Thank you, Mike9241.  I will check with our estate lawyer and our brokerage firm.

[Mike9241]

I suggested an attorney because I don't know the provisions of the trust. So this is a matter outside of tax law.

however from authoritative literature for nonspousal beneficiaries the following rules apply to IRA beneficiaries 

1) 10% early withdrawal additional tax does not apply to distributions

2) cannot treat the inherited IRA as their own. thus they cannot roll over any distributions into their own IRA

3) can make trustee-to-trustee transfer of the account to newly created "inherited IRA" (an IRA in the decedent's name but payable to the named beneficiary) at a different financial institution

4) No contribution can be made to an inherited IRA 

[dmertz]

Here are several written determinations related to this that I've made note of over the years:

202031007
201128036
200647029
200646025
200343030

Note that written determinations only apply to the taxpayer making the request, but these demonstrate that the IRS generally has no problem with the IRA inherited by the trust being split and retitled into inherited IRAs for the benefit of the trust beneficiaries, provided that the trust does not have a restriction against doing so.

[budsara1]

Hello dmertz and Mike9241,

I just wanted to thank you for your help with this matter.

After several calls, emails, and phone messages, my brokerage did allow the inherited IRA that was placed in the family trust to be split into two inherited beneficiary IRAs for my brother and me.

Your expert knowledge and advice gave me the confidence to push the matter with the brokerage.  Even though I had asked the broker about what could be done to prevent the hassle of submitting a 1041 each year, he did not offer this solution.  Armed with information you provided, I pushed him to contact his main office.  Turns out, the process was really quite simple, but did take some time to complete.  It was obvious from the document package that the main office had done this before.

Keep up the good work.  I really appreciate that you are here to help people.