Inherited IRA distributions may use a trust beneficiary's life expectancy

Plain-English summary

A decedent named a testamentary trust as beneficiary of three IRAs that were later combined into one inherited IRA. The IRS ruled that the trust met the regulatory requirements for its beneficiaries, rather than the trust itself, to be treated as the IRA's designated beneficiaries. Three family members had to be considered, while more remote potential recipients were merely successor beneficiaries. Because the decedent's child had the shortest life expectancy among the beneficiaries who counted, required minimum distributions from the inherited IRA could use that child's life expectancy.

Ruling snapshot

• Question: May the trust beneficiaries be treated as the inherited IRA's designated beneficiaries, with distributions based on the decedent's child's life expectancy?
• Outcome: Approved
• Key authorities: IRC §§ 401(a)(9) and 408(a)(6); Treas. Reg. §§ 1.401(a)(9)-4, 1.401(a)(9)-5, and 1.408-8

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201633025 Third Party Communication: None
Release Date: 8/12/2016 Date of Communication: Not Applicable
Index Number: 401.06-02, 408.02-01
Person To Contact:
------------------------------------- ---------------------------, ID No. ---------------
------------------------------------------------- -----------------
-------------------------------------------- Telephone Number:
------------------------ ----------------------
-------------------------------- Refer Reply To:
CC:TEGE:EB:QP4
------------------------------- PLR-138187-15
Date:
May 18, 2016

LEGEND:

Decedent = ---------------------------

Trust = ---------------------------------
-------

State = ----------

Financial = --------------------------------
Institution A ------

Financial = --------------
Institution B

Financial = ---------
Institution C

Financial = ---------------------------------
Institution D ----------------------------------
---------------------------

Individual E = ----------------------------------
----------

Individual F = ---------------------

Individual G = ------------------------

Individual H = --------------
2

Individual I = -------------------

IRA X = ----------------------------------
---------------------------------
---------------------------------
---------------------------------
---------------------------------
----------------

Date 1 = ------------------------

Date 2 = ---------------------------

Date 3 = ---------------------------

Dear -------------------:

This letter is in response to your request received on November 23, 2015, as
supplemented by correspondence dated January 7, 2016, submitted by your authorized
representative, in which you request rulings regarding the proper applicable distribution
period under section 401(a)(9) of the Internal Revenue Code for payments from an IRA.

The following facts and representations have been submitted under penalties of perjury
in support of the rulings requested:

Decedent died at age 59 on Date 1. Decedent maintained three IRAs, one each with
Financial Institution A, Financial Institution B, and Financial Institution C. The sole
named beneficiary of each of those IRAs was Trust.

Trust is a trust created under Decedent’s will. Trust is irrevocable and is valid under the
laws of State. Financial Institution D is the trustee of Trust. A copy of Decedent’s will
containing the terms of Trust was provided to Financial Institution D on or about Date 2.

On or about Date 3, after Decedent’s death, Financial Institution D, as trustee of Trust,
combined the three IRAs maintained with Financial Institution A, Financial Institution B,
and Financial Institution C into IRA X, which is an inherited IRA for the benefit of Trust
with Financial Institution D as custodian.

Individual E is the child of Decedent. Individual F and Individual G are the children of
Individual E. Individual H and Individual I are the siblings of Decedent.

Under the terms of Trust, the trustee is to distribute all net income of Trust to Individual
E. The trustee also has discretion to make distributions of principal to Individual E or
Individual E’s issue for health, education, support, or maintenance; Financial Institution
D, as trustee, has made discretionary distributions to Individual E. Trust will terminate
when Individual E attains fifty years of age, at which time the trustee will distribute the
PLR-138187-15 3

remaining income and principal to Individual E. If Individual E dies prior to attaining age
fifty, Trust will terminate and will be distributed to the children of Individual E. However,
if a beneficiary is under age twenty-one at the time he or she becomes entitled to
receive his or her share, the trustee retains possession of the share in trust until the
beneficiary attains age twenty-one; if the beneficiary dies before attaining age twenty-
one, the beneficiary’s share is paid to the beneficiary’s personal representatives.

If Individual E and all her issue are deceased at any time prior to final distribution of
assets from Trust, the trustee shall distribute the remaining assets to Individual H and
Individual I. If Individual E, all her issue, Individual H, and Individual I are deceased
prior to final distribution of assets from Trust, the trustee shall distribute the remaining
assets to various charitable organizations.

Since Decedent’s death, Trust has taken distributions from IRA X that comply with the
minimum distribution requirements that would apply if the applicable distribution period
is based on Individual E’s life expectancy.

Based on the foregoing, you request rulings that:

1) The beneficiaries of Trust (and not Trust itself) are treated as having been
designated as beneficiaries of IRA X for purposes of determining the applicable
distribution period under section 401(a)(9); and

2) The applicable distribution period for calculating the required minimum
distributions from IRA X is based on Individual E’s life expectancy.

With respect to your ruling requests, section 408(a)(6) provides, with respect to IRAs,
that under regulations prescribed by the Secretary, rules similar to the rules of
section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall
apply to the distribution of the entire interest of an individual for whose benefit the IRA is
maintained.

Treasury Regulation §1.408-8, Q&A-1(a) provides that an IRA is subject to the required
minimum distribution rules provided in section 401(a)(9). In order to satisfy section
401(a)(9), the rules of §§1.401(a)(9)-1 through 1.401(a)(9)-9 must be applied, except as
otherwise provided in that section.

Section 1.408-8, Q&A-1(b) provides that for purposes of applying the required minimum
distribution rules in §§1.401(a)(9)-1 through 1.401(a)(9)-9, the IRA trustee, custodian or
issuer is treated as the plan administrator, and the IRA owner is substituted for the
employee.

Section 1.408-8, Q&A-3 provides that in the case of distributions from an IRA, the term
“required beginning date” means April 1 of the calendar year following the calendar year
in which the individual attains age 70 ½.
PLR-138187-15 4

Section 401(a)(9)(A) provides that the entire interest of an employee (i) must be
distributed to such employee not later than the required beginning date, or (ii) must be
distributed, beginning not later than the required beginning date, over the life of such
employee or over the lives of such employee and a designated beneficiary (or over a
period not extending beyond the life expectancy of such employee or the life
expectancy of such employee and a designated beneficiary).

Section 401(a)(9)(B)(ii) provides that when an employee dies before distributions have
begun under subparagraph (A)(ii), the entire portion of such interest will be distributed
within 5 years after the death of such employee.

Section 401(a)(9)(B)(iii) provides an exception to section 401(a)(9)(B)(ii) under which if
any portion of an employee’s benefit is payable to a designated beneficiary, the portion
will be distributed over the life of such designated beneficiary (or over a period not
extending beyond the life expectancy of such beneficiary), provided such distributions
begin no later than 1 year after the employee’s death or such later date as the Secretary
may prescribe by regulations.

Section 401(a)(9)(C)(i) provides that “required beginning date” means April 1 of the
calendar year following the later of (I) the calendar year in which the employee turns
age 70 ½, or (II) the calendar year in which the employee retires.

Section 401(a)(9)(E) provides that “designated beneficiary” means any individual
designated as a beneficiary by the employee.

Section 1.401(a)(9)-4, Q&A-1 provides, in relevant part, that a designated beneficiary is
an individual who is designated as a beneficiary under the plan. An individual may be
designated as a beneficiary under the plan either by the terms of the plan or, if the plan
so provides, by an affirmative election by the employee (or the employee's surviving
spouse) specifying the beneficiary. A designated beneficiary need not be specified by
name in the plan in order to be a designated beneficiary so long as the individual who is
to be the beneficiary is identifiable under the plan. The member of a class of
beneficiaries capable of contraction or expansion will be treated as being identifiable if it
is possible to identify the class member with the shortest life expectancy. However, the
passing of an employee's interest to an individual under a will or otherwise under
applicable state law will not make that individual a designated beneficiary under section
401(a)(9)(E) unless that individual is designated as a beneficiary under the plan.

Section 1.401(a)(9)-4, Q&A-3 provides that only individuals may be designated
beneficiaries for purposes of section 401(a)(9). A person who is not an individual, such
as the employee's estate, may not be a designated beneficiary. If a person other than
an individual is designated as a beneficiary of an employee's benefit, the employee will
PLR-138187-15 5

be treated as having no designated beneficiary for purposes of section 401(a)(9), even
if there are also individuals designated as beneficiaries.

Section 1.401(a)(9)-4, Q&A-5 provides that beneficiaries of a trust with respect to the
trust's interest in an employee's benefit (and not the trust itself) will be treated as having
been designated as beneficiaries for purposes of determining the applicable distribution
period if certain requirements are met. The requirements are that (1) the trust is a valid
trust under state law; (2) the trust is irrevocable or will, by its terms, become irrevocable
upon the death of the employee; (3) the beneficiaries of the trust who are beneficiaries
with respect to the trust’s interest in employee’s benefit are identifiable from the trust
instrument; and (4) certain documentation has been provided to the plan administrator.

Section 1.401(a)(9)-4, Q&A-6 provides that in order to satisfy the fourth requirement of
§1.401(a)(9)-4, Q&A-5, the trustee of the trust must provide certain documentation
(such as a copy of the actual trust document of the trust that is the named beneficiary)
by October 31 of the calendar year immediately following the calendar year in which the
employee died. However, §1.401(a)(9)-1, Q&A-2(c) provides, in effect, that this
requirement will be considered satisfied if the documentation is provided to the plan
administrator by October 31, 2003.

Section 1.401(a)(9)-5, Q&A-1 provides that the amount required to be distributed for
each calendar year is equal to the amount of the account divided by the applicable
distribution period.

Section 1.401(a)(9)-5, Q&A-5 provides that, if an employee dies before distributions
have begun, the applicable distribution period is based on the life expectancy of the
designated beneficiary.

Section 1.401(a)(9)-5, Q&A-7(a) provides that if an employee has more than one
individual that is a designated beneficiary, the designated beneficiary with the shortest
life expectancy will be the designated beneficiary for purposes of determining the
applicable distribution period.

Section 1.401(a)(9)-5, Q&A-7(b) provides that a contingent beneficiary (one whose
entitlement to an employee’s benefit after the employee’s death is a contingent right) is
considered a beneficiary for purposes of determining the designated beneficiary with the
shortest life expectancy and whether a person other than an individual is a beneficiary,
except as provided in §1.401(a)(9)-5, Q&A-7(c)(1).

Section 1.401(a)(9)-5, Q&A-7(c)(1) provides that for purposes of determining the
beneficiary with the shortest life expectancy or whether a person other than an
individual is a beneficiary, a person will not be considered a beneficiary merely because
that person could become the successor to the interest of one of the employee’s
beneficiaries after that beneficiary’s death. However, this exception does not apply to a
PLR-138187-15 6

person who has any right (including a contingent right) to an employee’s benefit beyond
being a mere potential successor to the interest of one of the employee’s beneficiaries
upon that beneficiary’s death. For example, if the first beneficiary has a right to all
income with respect to an employee's individual account during that beneficiary's life
and a second beneficiary has a right to the principal but only after the death of the first
income beneficiary (any portion of the principal distributed during the life of the first
income beneficiary to be held in trust until that first beneficiary's death), both
beneficiaries must be taken into account in determining the beneficiary with the shortest
life expectancy and whether only individuals are beneficiaries.

In regard to the first ruling request, based on your representation, the trust meets the
four requirements of §1.401(a)(9)-4, Q&A-5 and therefore the beneficiaries of Trust are
treated as designated beneficiaries of IRA X for purposes of determining the applicable
distribution period under section 401(a)(9).

In regard to the second ruling request, Individual E, Individual F, and Individual G are
the only beneficiaries taken into account for purposes of determining the applicable
distribution period. Individual E is taken into account as a designated beneficiary
because she is entitled to all net income of Trust while she is alive and is entitled to a
distribution of the entire trust if she attains age 50. Individual F and Individual G are
also taken into account as designated beneficiaries because the trustee has the
discretion to make distributions of principal to them during Individual E’s lifetime for their
health, education, support, or maintenance, in addition to their contingent interest in the
remainder of the Trust if Individual E dies before receiving full distribution of the Trust at
age 50. All other potential recipients of the funds in the Trust are mere successor
beneficiaries within the meaning of the regulations.

Individual E has the shortest life expectancy of the three designated beneficiaries taken
into account in determining the applicable distribution period. Accordingly, the
applicable distribution period for calculating the required minimum distributions from IRA
X is based on Individual E’s life expectancy.

This ruling expresses no opinion on the property rights of the parties under state law,
and only provides a ruling on the impact of federal tax law on the specific facts
presented.

This ruling is based on the assumption that the three IRAs maintained with Financial
Institution A, Financial Institution B, and Financial Institution C were properly combined
into IRA X.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
PLR-138187-15 7

submitted in support of the request for rulings, it is subject to verification on
examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Additionally, no opinion is expressed as to the tax treatment of the
transaction described herein under the provisions of any other section of either the
Code or regulations which may be applicable thereto.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited by others as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                Sincerely yours,



                                Anne Bolling
                                Acting Assistant to the Branch Chief
                                Qualified Plans Branch 4
                                Office of Associate Chief Counsel
                                (Tax Exempt & Government Entities)