On Sept. 5, 2012, the Internal Revenue Service issued six determinations approving a see-through trust’s action to divide an individual retirement account into nine IRAs (Private Letter Ruling 201241017). The decedent owned two IRAs at the time of her death, each of which designated Trust T as its beneficiary. The trust property was to be paid to nine individual beneficiaries, all of whom survived the decedent. After the decedent’s death, the trustee of Trust T established an IRA for the benefit of Trust T, transferring the assets from the two original IRAs into a new IRA. The trustee then sought to divide the new IRA into nine IRAs, each for the respective benefit of one of the nine beneficiaries. The trustee sought rulings on six issues:
- Does Trust T constitute a see-through trust under Treasury Regulations Section 1.401(a)(9)-4, Q&A-5?
- Are the nine single-beneficiary IRAs inherited IRAs within the meaning of Internal Revenue Code Section 408(d)(3)(C)?
- Do IRC Sections 401(a)(9) and 408 preclude the division of the new IRA into nine single-beneficiary IRAs?
- Do the trustee-to-trustee transfers from the two IRAs into the new IRA constitute taxable distributions, payments or attempted rollovers?
- Will the new IRA and each of the nine single-beneficiary IRAs lose their qualified status under Section 408?
- Can the nine individual beneficiaries receive their required minimum distributions (RMDs) under Section 401(a)(9) from their own inherited IRAs, using the life expectancy of the oldest beneficiary, who remains a beneficiary as of Sept. 30 of the year following the decedent’s death?
Yup, It’s a See-Through Trust
The IRS found that the trustee timely provided sufficient documentation to the IRA custodian to identify the trust’s beneficiaries. As a result, Trust T constituted a see-through trust within the meaning of Treas. Regs. Section 1.401(a)(9)-4, Q&A-5.
One “Yes,” Three “Nos”
In response to the trustee’s next four requests, the IRS first determined that the nine single-beneficiary IRAs were inherited IRAs. Under Section 408(d)(3)(C), an inherited IRA is one that’s acquired by a beneficiary (who isn’t the decedent’s surviving spouse), by reason of the death of another. All nine beneficiaries satisfied the test under the IRC.
The IRS next determined that Sections 401(a)(9) and 408 didn’t preclude the division of the new IRA into nine single-beneficiary IRAs. Although the IRC does preclude separate account treatment when assets pass to beneficiaries through a trust, it doesn’t forbid the posthumous combination of the two IRAs into the new IRA. Moreover, although amounts paid or distributed from an IRA are generally taxable to a distributee, a trustee-to-trustee transfer doesn’t constitute a payment or distribution. Nor are the trustee-to-trustee transfers attempted rollovers. And, the trustee-to-trustee transfers to the new IRA and nine single-beneficiary IRAs don’t cause the IRAs to lose their qualified status under Section 408(a).
Whose Lifespan to Use for RMDs?
Finally, each of the nine beneficiaries could receive RMDs from their respective inherited IRAs, using the life expectancy of the oldest beneficiary. Under Treas. Regs. Section 1.401(a)(9)-5, if there’s more than one beneficiary, the individual with the shortest life expectancy (that is, the oldest beneficiary), is designated for determining the applicable distribution period.