Take-Away: An IRA that names a trust as its beneficiary results in several, often negative, mandatory distribution rules. The trust must qualify as a ‘see-through’ trust in order to use the oldest trust beneficiary’s life expectancy to calculate required minimum distributions (RMDs), and the IRA normally cannot be rolled over to continue to delay taking IRA distributions. But a series of timely qualified disclaimers can help to avoid some of these negative distribution rules. This was demonstrated in a recent private letter ruling (PLR) coming from the IRS.

PLR 201901005: This PLR was dated October 10,2018 and released on January 4, 2019.

Facts: Husband died when he was over the age 70 1/2, so he was required to take distributions from his IRA. Husband was survived by his wife, a son, and two grandchildren. The PLR is silent as to the wife’s age, which seemed to be the reason for this planning undertaken by the family. Husband’s IRA was made payable to his Trust. There was no contingent beneficiary named on the IRA beneficiary designation form. Consequently, on Husband’s death, his entire IRA was payable to his Trust.

Problem: The PLR was silent if the Trust qualified as a ‘see-through’ Trust. Nor did the PLR describe the beneficiaries of the Trust. Either the Trust did not meet the see-through rules, or the family did not want to start taking RMD’s from the IRA.

Recall that only a surviving spouse can claim a rollover of a decedent’s IRA. All IRA beneficiaries, including Trusts, must take distributions from an inherited IRA.

Consequently, either the Trust did not meet the see-through trust requirements, causing the IRA to be depleted using the IRA owner’s normal life expectancy following the IRS’ Tables, and not a trust beneficiary’s life expectancy, or the family wanted to avoid taking any taxable RMD’s from the decedent’s IRA as long as possible. We are only left to guess what motivated the family to engage in this planning.

Solution to the Problem:  Through a series of qualified disclaimers under IRC 2518, the family was able to have Husband’s IRA rolled-over to Wife, who arguably will not be subject to required minimum distributions until she attains age 70 1/2. Multiple steps,  I crafter to them as cascading qualified disclaimers, were required to achieve this goal.

Step #1: The Trustee disclaimed its interest in Husband’s IRA. Under Michigan law a trustee also possesses the power to disclaim a property interest that is directed to the trust.

Comment: While the Michigan Disclaimer Act provides this authority that is available to a fiduciary, it might be wise to expressly include the authority to make a qualified disclaimer in the trustee powers included in the trust instrument. This might then avoid the need for the trustee to petition the probate court for the authority to make a disclaimer. Recall that a qualified disclaimer under IRC 2518 must be within 9 months of the creation of the interest to be disclaimed, so time is of the essence and waiting for a hearing before a probate court could come close to violating the 9-month rule.

With this disclaimer by the trustee, the IRA then passed to the Husband’s probate estate under that state’s law- in sum, the IRA automatically became a probate asset.

Step #2: The son, an heir of his father, then filed a qualified disclaimer of any interest in the IRA in the probate estate proceeding.

Steps #’s 3 and 4: The two grandchildren, also heirs of their grandfather, each also filed qualified disclaimers of their interests in their grandfather’s IRA in the probate estate proceeding.

Step #5: With the four prior qualified disclaimers completed all within 9 months of Husband’s death, that left Wife as the sole estate beneficiary who was entitled to the IRA in the probate estate. The surviving spouse then had 60 days from the date that she became the sole beneficiary of the estate, entitled to inherit the IRA to roll the balance of Husband’s IRA into an IRA in her own name.

If Wife was then under the age 70 1/2, she could delay taking any distributions from ‘her’ IRA until she reached that age. Also, because the IRA after that rollover becomes the Wife’s own IRA, it should be protected from any creditor claims, at least that would be the case under Michigan law, although as pointed out recently, that might not be the case if the Wife filed for bankruptcy since the rollover IRA assets did not originate from her own earnings.

Conclusion: Obtaining a private letter ruling from the IRS is a very expensive proposition. I suspect that the amount held in Husband’s IRA was significant enough to warrant the expense incurred to obtain the private letter ruling. But the use of cascading qualified disclaimers illustrates how immediate taxable distributions from an IRA can be delayed if there is a surviving spouse who is under age 70 1/2 and an IRA rollover is used to delay the taking of RMDs.

Much of this expense incurred by the family, e.g. expensive PLR ruling fee, legal fees in the preparation of several qualified disclaimers,  might have been avoided if Husband had named Wife as the contingent beneficiary of the IRA, and had empowered the Trustee to make a qualified disclaimer of the IRA. Better yet would have been for Husband to name Wife as the primary beneficiary of the IRA with the Trustee named as the contingent IRA beneficiary. In the end, it pays to think carefully about the sequence of named IRA beneficiaries. But even if the sequence of named beneficiaries, with hindsight, does not make much tax sense, consider the use of cascading qualified disclaimers to attempt to reach the best result.