Important Trust Deadline Approaching

For trusts that inherited an IRA in 2019, an important deadline is approaching. The due date to provide required trust documentation to the IRA custodian to ensure that the longest payout period possible is available for the inherited IRA is October 31, 2020.

Generally, only individuals who are named on an IRA beneficiary form can be designated beneficiaries. A trust is not an individual, but if the trust qualifies as a “look through” or “see-through” trust, then each individual beneficiary of the trust can qualify as a designated beneficiary for IRA distribution purposes. For trusts that inherited in 2019, prior to the enactment of the SECURE Act in 2020, this would allow each trust beneficiary to stretch payments over the life expectancy of the oldest beneficiary.

To qualify as what the IRS refers to as a “see-through” trust for IRA distribution purposes, the trust must meet the following four requirements outlined in IRS Regulation Section 1.401(a)(9)-4, A-5:

  1. The trust is valid under state law or would be but for the fact that there is no corpus.
  2. The trust is irrevocable, or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.
  3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the IRA owner’s benefit are identifiable.
  4. The required trust documentation has been provided by the trustee of the trust to the IRA custodian no later than October 31st of the year following the year of the IRA owner’s death.

Some of the four requirements are more complicated than others. For example, the third requirement of identifying the beneficiaries is a process strewn with potential pitfalls and can be challenging even for the most experienced estate attorney.

However, the fourth requirement listed above seems deceptively straightforward. What exactly has to be done by October 31, 2020? A copy of the trust or a list of the beneficiaries and their entitlements must be provided to the IRA custodian. It’s just paperwork. You may think this requirement would be a slam dunk. How difficult can it be to provide the necessary documents? Well, apparently, it’s tougher than one might expect. This is the requirement that is actually missed most frequently.

Part of the problem may be with who has the responsibility to meet this requirement. Who has to do this? The answer, the trustee of the trust. The responsibility does not fall on the attorney, the financial advisor, the CPA or any other professional who might have worked on the estate plan. The trustee of the trust is often a family member with no special background or training in this area. The trustee many times has no clue about this requirement.

Don’t miss the October 31st deadline by failing to provide the necessary paperwork. Trusts that fail to fulfill these requirements will not be considered designated beneficiaries, and the opportunity to use the maximum stretch will be lost forever. There is no way to fix this easily avoidable mistake.

America’s Tax Solutions®, the #1 Provider of Retirement Distribution Strategies, is the only community-based, one-stop resource specializing in retirement distribution planning and related tax mitigation. Few investors realize that the federal government is actually the primary beneficiary of their retirement accounts and, unless the take specific steps to “disinherit” Uncle Sam, they could lose anywhere from 35% to 80% of their retirement to taxes.
The rules surrounding distributions from retirement accounts are especially complex. Therefore, we will be sending you our exclusive Tax Tips periodically to help you understand the tax code, so you can maximize your clients’ retirement. To ensure compliance requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication was not intended or written to be used, and cannot be used, for purpose of (i) avoiding tax-related penalties under Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.
This is not intended as a solicitation or advertisement for legal services. The information contained herein is not intended as legal advice.

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