Background
In Private Letter Ruling 200846028, the Service ruled that an IRA account beneficiary designation “as stated in wills” was invalid in spite of a court order providing that this designation should be treated as a designation of a trust as the beneficiary. Because of the IRS’s ruling, the IRA was treated as having no designated beneficiary.
In the ruling, the facts provide that the taxpayer died at age 65, having executed both his last will and testament and a trust document. The trust was irrevocable upon his death. On his IRA application, the taxpayer listed his primary beneficiary only “as stated in wills” on the beneficiary designation form.
The taxpayer’s will provided that the residuary estate, which included his IRA account, was to be distributed to eight named individuals in the percentages stated in the trust document. After the taxpayer’s death, his personal representative petitioned the state court to issue an order providing that the language used in the IRA document to designate the beneficiaries (“as stated in wills”) be treated as a designation of the decedent’s trust as the designated beneficiary of the IRA.
One of the beneficiaries then applied for an IRS private letter ruling requesting that the Court’s ruling be applied for purposes of the required minimum distribution requirement for beneficiaries of the IRA, allowing distribution over the life expectancy of the beneficiary.
The IRS denied the request based upon the fact that the beneficiaries of the IRA were not identifiable from the designation language “as stated in wills” at the time of the taxpayer’s death. Because the language used didn’t include any reference to the trust, the trust could not be retroactively considered a named beneficiary of the IRA, despite the court order. The IRA was therefore considered to have no designated beneficiary, thus, the decedent’s estate was considered to be the beneficiary.
Accordingly, the entire IRA balance was subject to the 5-year distribution rule, requiring full liquidation of the account no later than December 31 of the year that includes the 5th anniversary of the owner’s death.
All beneficiaries must be individuals
The ruling illustrates the importance of naming an individual as designated beneficiary on an IRA account. A trust can also work for this purpose as long as the trust is the named beneficiary on the IRA document and meets the following requirements from Reg. §1.401(a)(9)-4:
- The trust is valid under state law, or would be but for the fact that it’s not yet funded.
- The trust is irrevocable or will, by its terms, become irrevocable upon death.
- The beneficiaries of the trust are identifiable from the trust instrument.
- A copy of the trust document has been provided to the IRA trustee or custodian.
Keep in mind that the beneficiaries under the trust instrument must all be individuals in order for the IRA to be treated as having a designated beneficiary. If any of the beneficiaries designated in the IRA document or the trust instrument are not individuals (e.g., a charitable organization), the IRA will not have a designated beneficiary. The effect will be to limit the distribution period to 5 years rather than the life expectancy of the beneficiary. |