Reporting an inherited IRA with a K-1 (1041)?

[dmertz]

"the Trust document states that 4 Beneficiaries have equal 25% shares."

From what you posted, I'm not sure that it says that:

"The Trustee shall immediately distribute all amounts withdrawn to: to my descendants, per stirpes, who are beneficiaries of this trust; and if no descendant of mine is a trust beneficiary, then to the trust's Income Beneficiaries in equal shares."

Of course if there 4 descendants who are beneficiaries under the trust, per stirpes, or there no descendants who are beneficiaries under the trust but there are 4 (non-descendant) income beneficiaries, your statement that there are 4 beneficiaries would be true.  What you posted does not seem to indicate whether descendant beneficiaries under the trust are equal beneficiaries.

The trust language you posted seems to suggest that the trust is not permitted to allocate shares of the inherited IRA out of the trust as inherited IRAs for the benefit of the trust beneficiaries but instead seems to say that the trust must be the entity that takes distributions.

These are all things that you should review with a competent trust attorney.

[trust812]

dmertz, I am sorry for the confusion! What I posted was Article 10 from my father’s Trust which only had to do with how to handle Retirement Plans such as IRA’s. Article 7 of his Trust is the Distribution section. It clearly mentions the 4 beneficiaries. I didn’t post it here because I didn’t want to redact the names of the beneficiaries, but basically in English it says that my father put 4 Beneficiaries with equal 25% shares on the Trust. 

The 4 Beneficiaries are:

(1) Me who is also the Successor Trustee, age 68

(2) My late brother’s sister-in-law, age 65

(3) My sister (age 67) who can’t manage money so my father wants me to manage her benefits for her.

(4) My father’s girlfriend (partner age 89) who he lived with for 20 years. They never married. My father also wants me to manage this share until she passes away and then my sister, my sister-in-law, and I will inherit what remains of her 25% share.

So with this added Beneficiary information does what I previously posted from the IRA section of my father’s Trust satisfy the 10 year IRS Secure Act See Through distribution rule to beneficiaries? I think so. 

And yes, I will talk to my father’s lawyer who set up the Trust either this week or in the very near future. I have met with him and my father in the past when he initially set up the Trust for my father. He doesn’t seem to be aware of all of the tax laws that he should be. I will seek a financial person if I need to but I posted on this forum to get other professionals opinions. As you are probably aware not all professionals have the same opinion 😂 

[dmertz]

@trust812 , definitely consult with the attorney because, as I read what you posted, there seems to me to be some ambiguity in the trust language.  As used in the tax code, "qualified retirement plan" generally refers to qualified retirement accounts other than IRAs, so it's not clear that what you posted applies to distributions from IRAs.  Also, if the section that you quoted does apply to IRAs, it seems to say that only you and your sister are to receive the income from the distributions from the IRA to the trust unless no descendants remain.  If the girlfriend is a beneficiary who is to receive income from the IRA while there are still living decendents, it seems that there must be annual RMDs based on the girlfriend's age, resulting in a distribution period of substantially less than 10 years.  If your father died in 2024, beneficiary RMDs would begin in 2025 and if the girlfriend will be age 90 in 2025, that would mean RMDs would be based on the girlfriend's life expectancy of 5.7 years even under the 10-year rule.  If the girlfriend is not to receive distributions, it might be that the annual RMDs would instead be based on your life-expectancy as the oldest beneficiary under the 10-year rule, but I haven't spent much time understanding the SECURE Act requirements for RMDs as they pertain to trusts with multiple beneficiaries, requirements that are a bit different from pre-SECURE Act requirements.

The trust does not satisfy the requirement for look-through until the IRA custodian is provided with by October 31 of the year following the year of death the documentation required by the custodian under these circumstances.

[trust812]

When the IRA custodian is provided the Trust documentation by October 31 of the year following the year of my father’s death, does the custodian determine whether the distribution is based upon the life expectancy of my father’s partner rather than 10 years or is this something my attorney or tax professional would decide? Also, according to the SECURE Act even if it was based upon my father’s partner’s life expectancy would it revert to my life expectancy (age 68) if my father’s partner died because I would then be the oldest of the 3 remaining beneficiaries?

Lots of questions! I am not getting warm and fuzzy feelings about my father’s lawyer’s estate planning business 😡 Although his law firm is well known in my area and a lot of people use them I don’t like the fact that he had pre-SECURE Act verbiage in the Trust when he created it post-SECURE Act in 2022. Also, since there are 2 non special needs beneficiaries (my sister-in-law and me) and 2 special needs beneficiaries (my sister and my father’s partner) my father’s lawyer should have made my sister-in-law and me 25% beneficiaries on my father’s IRA and the Trust a 50% Beneficiary for my sister and my father’s Trust. In that case each of their 25% would be managed within the Trust because they are special cases. Now said lawyer, who I am starting to think is incompetent, wants more money to make SubTrusts under my father’s main Trust for my sister and my father’s partner. To me unless it’s absolutely necessary, it creates more complicity because now the Trust would need 3 Tax ID’s (1 for my father’s main Trust and 2 for the SubTrusts) and 3 Tax Returns would need to be filed each year!

[dmertz]

The IRA custodian might try to help determine the RMDs, but they don't always get it right and they are not required to do so for inherited IRAs.  Ultimately it's the responsibility of the trustee of the trust to request the necessary distributions, so I would rely on the advice of the trust attorney or another knowledgeable tax professional like a CPA.  The distributions would only be based on the age of your father if your father was the  same age as or younger than the girlfriend and the RMDs would otherwise be based on the age of the girlfriend.

I don't know if the RMD calculation would revert to using your age if the girlfriend beneficiary dies.

It's not entirely certain that the SECURE Act changes weren't taken into account when preparing the trust document since age of the beneficiaries is a factor in determining RMD both pre-SECURE Act and post-SECURE Act.  The preliminary regulations weren't published in the Federal Register until February 24, 2022 and the final regulations didn't become effective until September 17, 2024, so things were still somewhat uncertain when the written.

From the information you've provided it's not clear that your sister and the girlfriend meet the definition of special-needs beneficiaries, but if they do, but it still doesn't seem that the requirements are met to be able to disregard the age of the girlfriend (assuming that the girlfriend is considered to be a beneficiary under the circumstances) in determining RMDs paid to the trust unless the present trust document specifies that sub-trusts are to be created.

"my father’s lawyer should have made my sister-in-law and me 25% beneficiaries on my father’s IRA and the Trust a 50% Beneficiary for my sister and my father’s Trust."

I agree that that would have made more sense if the intent was to simply divide in equal shares, but the result would be different if the intent was to allow the other trust beneficiaries to receive the income when one or more of the trust beneficiaries dies.

Does the present trust document specify that sub-trusts are to be established?  If not, I don't understand how sub-trusts would be permitted to be established and, even if permitted to be established, it seems that they wouldn't be established under the terms of the present trust to allow those trust beneficiaries to be disregarded in determining the RMD for your share.

[trust812]

“IRA custodian might try to help determine the RMDs, but they don't always get it right and they are not required to do so for inherited IRAs.  Ultimately it's the responsibility of the trustee of the trust to request the necessary distributions, so I would rely on the advice of the trust attorney or another knowledgeable tax professional like a CPA.”

Are you saying a custodian such as Charles Schwab, or any custodian for that matter, after reading the Trust’s documents doesn’t make a Trustee empty the IRA within a certain number of years, for example, 5 or 10 years, and it’s solely up to the Successor Trustee to determine the number of years hopefully based on good legal or CPA advice? 

I think that there is a clause that allows SubTrusts but I don’t think I will have the lawyer create them since I didn’t like his other advice. In my opinion it only complicates things especially when I would have to file 3 sets of taxes. 

What a mess! I wish my father hadn’t done the Trust.

Thanks for all of your thoughts on this subject!

[trust812]

dmertz, rereading your comments I think that you are correct. IRA’s are not considered Qualified Retirement Plans so that section of my father’s Trust does not apply. 

From Investopedia:

“A qualified retirement plan is an investment plan offered by an employer that qualifies for tax breaks under the Internal Revenue Service (IRS) and ERISA guidelines. Because an individual retirement account (IRA) is not offered by employers, a traditional or Roth IRA is not considered a qualified plan, although they feature many of the same tax benefits for retirement savers.”

https://www.investopedia.com/ask/answers/102714/ira-qualified-plan.asp

Before my father died my father’s attorney gave us both all of the Trust documents on a USB drive in searchable PDF files. I did a search on the word “IRA” and nothing was found so I don’t think there is an IRA section for his Trust. I wonder why? Maybe it means that the Trust follows IRS Guidelines. Even so my father’s Trust follows all 4 See-Through Trust rules and the IRS extended them for the Secure Act. Also, the IRS waived required minimum distributions (RMDs) for inherited IRA beneficiaries in 2021, 2022, and 2023, and again for 2024 which might mean they will waive them permanently. 

From Fidelity:

“See-through trust rules Pre-SECURE Act 1.0, a trust needed to meet "see-through" requirements to ensure that as a beneficiary, the trust would qualify for life expectancy stretch provisions. There are 4 requirements to qualify as a see-through trust:

1) The  trust must be valid under state law.

2) The  trust must be irrevocable or become irrevocable upon the death of the account holder.

3) All of the trust's underlying beneficiaries must be identifiable as being eligible to be designated beneficiaries themselves.

4) copy of the trust must be provided to the custodian by October 31 the following year after the account holder's death.

Post-SECURE Act 1.0, there was some uncertainty as to whether the "see-through" rules will apply because they were not specifically addressed in the SECURE Act legislation. The IRS, however, published proposed regulations in February 2022 which included "see-through" trust rules: These regulations acknowledge the "see-through" trust concept and allow the IRA assets to be withdrawn within a 10-year period.

The IRS waived required minimum distributions (RMDs) for inherited IRA beneficiaries in 2021, 2022, and 2023, and again for 2024. This means that beneficiaries who are subject to the 10-year rule will not face penalties for failing to take an RMD in 2024.“

[dmertz]

"the IRS waived required minimum distributions (RMDs) for inherited IRA beneficiaries in 2021, 2022, and 2023, and again for 2024 which might mean they will waive them permanently."

Absent some unforeseen reason, the penalty for failing to take a beneficiary RMDs that circumstances require be taken under the 10-year rule will not be waived for 2025.  The IRS waived the penalty for 2021 through 2024 only because the regulations resulting from the SECURE Act had not been finalized by the end of 2023.  Those regulations are now finalized.

To see if individual retirement accounts are mentioned, be sure to also search the trust document for the word 'retirement.'

If the trust document does not otherwise address IRAs and the term qualified retirement plan as used in the trust document does not include IRAs, it does seem that the IRA, or the income from the IRA, is to be divided equally among the beneficiaries.  Unless a sub-trust is established for each beneficiary under the terms of the trust and the girlfriend is disabled or chronically ill, it appears that all beneficiaries would be subject to RMDs based on the age of the girlfriend, requiring the IRA to be fully distributed in substantially less than 10 years.  If sub-trusts are established for each beneficiary, presumably the IRA would have to be subdivided into a separate inherited IRAs, one for each beneficiary.  With sub-trusts established, the inherited IRA subdivided, and your sister disabled or chronically ill, only your sister would avoid fully distributing the IRA by the end of the 10th year by being an EDB treated separately.  (Even if the girlfriend qualifies as a disabled or chronically ill EDB permitted to be treated separately, the girlfriend's share of the inherited IRA would be required to be fully distributed in substantially less than 10 years because of the girlfriend's age).

[trust812]

“If sub-trusts are established for each beneficiary, presumably the IRA would have to be subdivided into a separate inherited IRAs, one for each beneficiary”.

In this case would the separate inherited IRA’s be based upon each beneficiary’s age? Would the inherited IRA’s remain as part of the main Trust and distributions still be managed by me as the Trustee or would the beneficiaries now manage their own SubTrusts and the IRA distributions?

[dmertz]

"In this case would the separate inherited IRA’s be based upon each beneficiary’s age?"

As I understand it, only for the disabled or chronically ill beneficiaries.  RMDs for the other beneficiaries would be based on the age of the oldest beneficiary.

How the sub-trusts would be managed would be subject to the terms of those trusts, and it seems to me that the terms of those trusts would be dictated by terms in the main trust, but I really don't know for sure.

[dmertz]

Some of my previous replies might be based on the proposed regulations rather than the final regulations and are therefore not entirely accurate.  I've taken a closer look at the final regulations and I suggest looking at § 1.401(a)(9)-8(a)(1)(iii) to see if the terms of the trust are sufficient and are implemented to allow separate accounting permitting each beneficiary's own age to be used in determining RMDs.

"Section 401(a)(9) is applied separately with respect to the separate interests of the beneficiaries of a see-through trust if the terms of the trust provide that it is to be divided immediately upon the death of the employee, provided that the requirements in paragraph (a)(1)(iii)(C) of this section are satisfied."

I suspect that the the trust in this case would not meet the requirements set forth in paragraph (a)(1)(iii)(C) since there seems to be discretion as to whether the trust is subdivided.

Also, without such subdivision, it appears that § 1.401(a)(9)-5(f) requires that RMDs for all beneficiaries be based on the age of the oldest beneficiary, in this case, the age of the girlfriend.

[dmertz]

A good reference from a well-known source in the industry:

https://www.kitces.com/blog/secure-act-2-0-irs-regulations-rmd-required-minimum-distributions-10-yea...

[trust812]

dmertz, thanks for the reference! One thing that is interesting is that the Trust does not use the words “Conduit” or “Accumulation” anywhere. Does that surprise you? My understanding is that “Conduit” usually means doing distributions through K-1’s issued to Beneficiaries but the “Accumulation” Trust won’t and for this type of distributions the Trust would pay a much higher tax rate as any income accumulated within the Trust.

[trust812]

“If sub-trusts are established for each beneficiary, presumably the IRA would have to be subdivided into a separate inherited IRAs, one for each beneficiary.”

demertz, I had a conference call with my attorney. Yes, he wants to create 4 SubTrusts and 4 new Trust Tax ID’s for each. There would be 4 separate Inherited IRA’s. My understanding is that these Tax ID’s would be used for the new SubTrust IRA’s and that equal 25% shares would be transferred to each of the 4. Is that correct? I am looking online at the Schwab form but I don’t seem to see a place for the new Beneficiaries if one of the 4 Beneficiaries dies.  Would that be controlled by the terms of the Trust document and me as the Trustee and if one of the 4 died before fully distributed I would open up yet another SubTrust in the new Beneficiary’s name per Trust document? 

[dmertz]

I'm guessing that each sub-trust would have to have language indicating the successor beneficiary, but I don't really know.  Some trusts have terms that allow the trustee to specify beneficiaries.  My choice for my own retirement accounts is to not have a trust as the beneficiary, but I don't have any beneficiaries with special needs.