Inherited retirement distributions may use daughter's life expectancy

Plain-English summary

A decedent named a retirement-account subtrust as beneficiary of traditional and Roth IRAs and two section 403(b) annuity contracts. Her daughter was the subtrust's sole beneficiary, and the trust required the trustee to distribute all amounts withdrawn from the retirement accounts, including required minimum distributions, to the daughter during her lifetime. Although the daughter held a testamentary power of appointment over an undistributed balance, the IRS found that retirement distributions could not accumulate in the subtrust for anyone else. The subtrust therefore qualified as a see-through trust, and the daughter was its sole identifiable designated beneficiary. Assuming the retirement accounts were properly combined into an IRA within the subtrust accounts, required minimum distributions could be calculated using the daughter's life expectancy.

Ruling snapshot

• Question: Could required minimum distributions from the inherited retirement accounts use the daughter's life expectancy?
• Outcome: approved
• Key authorities: IRC §§ 401(a)(9), 403(b)(10), 408(a)(6); Treas. Reg. §§ 1.401(a)(9)-4, 1.401(a)(9)-5, 1.403(b)-6, 1.408-8

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201750004                                            Third Party Communication: None
Release Date: 12/15/2017                                     Date of Communication: Not Applicable
Index Number: 401.00-00, 401.06-02,
              403.04-06, 408.02-01                           Person To Contact:
                                                             -----------------, ID No. ------------------
------------------------------                               Telephone Number:
-------------------------------                              ----------------------
-----------------------------                                Refer Reply To:
                                                             CC:TEGE:EB:QP1
                                                             PLR-108823-17
         In Re: --------------------                         Date:
                                                             September 12, 2017




Legend


Decedent            = ------------------
Trust               = ----------------------------------------------------------
Date 1              = --------------------------
Date 2              = -------------------
Date 3              = ---------------------------
Date 4              = --------------------
Daughter            = -------------------
Company 1           = ---------------------------------------------------
Company 2           = ---------------------------------------------------------------------
Amount 1            = ----------------
Amount 2            = ----------------
Amount 3            = ------------------
Amount 4            = ----------------
State A             = --------------
Law 1               = ------------------------------------------------------------------------
Subtrust              ---------------------------------------------------------------------------------------------
Accounts              ---------------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------------
                      ---------------------------------------------------------------------------------------------
                      ------------------------------
Court               = ---------------------------------------------------------------------------------------------
                      ------------------

PLR-108823-17                                 2


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

This is in response to the March 10, 2017, letter submitted on your behalf by your
authorized representative, as supplemented by further correspondence dated July 7,
2017, and September 8, 2017, in which you request a letter ruling under section
401(a)(9) of the Internal Revenue Code (“Code”) and its corresponding Treasury
Regulations.

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

Decedent established the Trust, a living revocable trust, on Date 1. On Date 2,
Decedent died at age 61 and was survived by Daughter, born on Date 3. Upon
Decedent’s death, the Trust became an irrevocable trust with Daughter as the sole
beneficiary of the Trust. Further, the Trust contains a subtrust established to hold all
assets from Decedent’s retirement accounts (the “Subtrust”). Daughter is also the sole
beneficiary of the Subtrust. At the time of her death, Decedent held one traditional
individual retirement account, one Roth individual retirement account, and two annuity
contracts under her former employer’s section 403(b) plan (together, the “Retirement
Accounts”). The Retirement Accounts held insurance and annuity contracts
administered by Company 1 and Company 2. At the time of Decedent’s death, the
approximate value of the assets held in each of the Retirements Accounts was Amount
1, Amount 2, Amount 3, and Amount 4, respectively. Subsequent to Decedent’s death,
Trustee transferred the assets of the Retirement Accounts into Subtrust Accounts.

Article 5.1 of the Trust states that the Trust shall be governed by State A law. Article
5.6 of the Trust states that the determination with respect to what is income and what is
principal of the Trust estate shall be governed by Law 1.

Article 6 of the Trust is titled “Designed Beneficiary Trust” and creates the Subtrust.
Article 6.1 of the Trust states that it is the intent of Decedent that “this [Subtrust]
qualifies as a ’see through’ or ’conduit’ trust within the meaning of [section] 1.401(a)(9)-
4, A-5.” It further states that all provisions of the Subtrust be construed in accordance
with this primary intent. Article 6.1 also states that the Subtrust is intended to be the
beneficiary of the Retirement Accounts. “Retirement Benefits” are defined in Article 6.7
of the Trust to include any benefit payable under the Trust under an IRA as defined in
section 408, a Roth IRA as defined in section 408A, an annuity or mutual fund plan
under section 403(b), or any other retirement plan that is subject to section the minimum
distribution requirements of 401(a)(9).

Article 6.3 of the Trust lists Daughter as the beneficiary of the Subtrust.

PLR-108823-17                                 3

Article 6.4.1 of the Trust states that, following the death of Decedent, beginning in the
year of Decedent’s death, Trustee shall withdraw benefits equaling the minimum
required distribution from any retirement account for which the Subtrust is named the
beneficiary and distribute those amounts (net of expenses) free of trust to Daughter or
Daughter’s successors if Daughter fails to survive full distribution of her share in the
Subtrust. Article 6.4.1 of the Trust further states that Trustee may pay or apply for the
benefit of Daughter (or the successor of Daughter’s interest if Daughter fails to survive
full distribution of her interest in Subtrust), as much of the income and principal of the
Subtrust that the Trustee deems necessary for Daughter’s (or Daughter’s successors)
health, maintenance, support, or education.

Article 6.4.4 of the Trust states that if a beneficiary for whom assets are being held dies
before reaching the age of 30, any undistributed balance of his or her share shall be
distributed to any person or entity the beneficiary appoints either through a written
instrument exercising this power of appointment or a valid will or living trust. If the
beneficiary does not exercise his or her power of appointment, the undistributed
balance shall be distributed to the beneficiary’s issue.

Article 6.5.1 of the Trust states that no retirement benefit may be distributed to any non-
individual beneficiary.

Article 6.8 excludes from the definition of “issue” any person adopted by the beneficiary
that is (1) adopted after the death of Decedent; and (2) older than the oldest beneficiary
of the Subtrust who was a class member at the time of the death of Decedent.

Based on the foregoing, you request a ruling that pursuant to the provisions of sections
1.401(a)(9)-5, Q&A-5(b), 1.401(a)(9)-5, Q&A-5(c), and 1.401(a)(9)-4 Q&A-5, that the
applicable distribution period for the subject retirement accounts held by Decedent is to
be calculated based on the life expectancy of Daughter, the designated beneficiary of
the Subtrust.

Under section 401(a)(9)(A), a trust will not be considered qualified unless the plan
provides that the entire interest of each employee (1) will be distributed to such
employee not later than the required beginning date, or (2) will be distributed, beginning
no 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.

PLR-108823-17                                 4

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 one 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 (1) the calendar year in which the employee turns
age 70 1/2, or (2) 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.

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 or a charitable organization, 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 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-4, provides in relevant part, that in order to be a designated
beneficiary, an individual must be a beneficiary as of the date of the employee’s death.
Generally, an employee’s designated beneficiary will be determined based on the
beneficiaries designated as of the date of death who remain beneficiaries as of
September 30 of the calendar year following the calendar year of the date of death.

Section 1.401(a)(9)-4, Q&A-5, provides that where a trust is named as a beneficiary of
an employee, the trust is not a designated beneficiary; however, beneficiaries of the
trust with respect to the trust’s interest in the employee’s benefit may be treated as
designated beneficiaries if the following requirements are met: (1) the trust is valid
under state law, or would be but for the fact there is no corpus; (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

PLR-108823-17                                 5

the employee’s benefit are identifiable within the meaning of section 1.401(a)(9)-4,
Q&A-1, from the trust instrument; and (4) relevant documentation has been timely
provided to the plan administrator.

Section 1.401(a)(9)-4, Q&A-6(b), provides, in relevant summary, that to meet the
requirements set forth in Q&A-5, at a minimum, documentation sufficient to enable a
plan administrator or an IRA custodian to identify beneficiaries of the plan or IRA must
be provided by a trustee to the custodian by October 31 of the calendar year
immediately following the calendar year in which the IRA owner died.

Section 1.401(a)(9)-5, Q&A- 5(b), provides that if an employee dies before the
employee's required beginning date, the applicable distribution period for minimum
distributions for distribution calendar years after the distribution calendar year containing
the employee's date of death is determined in accordance with section 1.401(a)(9)-5,
Q&A-5(c)
Section 1.401(a)(9)-5, Q&A-5(c)(1), states that, with respect to minimum distributions
paid to nonspouse designated beneficiary, the applicable distribution period measured
by the beneficiary's remaining life expectancy is determined using the beneficiary's age
as of the beneficiary's birthday in the calendar year immediately following the calendar
year of the employee's death. In subsequent calendar years, the applicable distribution
period is reduced by one for each calendar year that has elapsed after the calendar
year immediately following the calendar year of the employee's death.

Section 403(b)(10) provides that annuity contracts and custodial accounts must follow
distribution requirements similar to those contained in section 401(a)(9).

Section 1.403(b)-6(e)(1) provides that a section 403(b) contract must meet the minimum
required distribution rules of section 401(a)(9).

Section 408(a)(6) provides that, under regulations prescribed by the Secretary, rules
similar to the rules of section 401(a)(9) shall apply to the distribution of the entire
interest of an individual for whose benefit the trust is maintained.

Section 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 sections 1.401(a)(9)-1 through 1.401(a)(9)-9 must be applied, except as
otherwise provided.

Section 1.408-8, Q&A-1(b) provides, as relevant, that for purposes of applying the
required minimum distribution rules in sections 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.

PLR-108823-17                                           6

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 1/2.

Section 1.408A-6, Q&A-14 provides that, for some purposes, Roth IRAs are subject to
the required minimum distribution rules under section 401(a)(9) and the accompanying
Treasury Regulations.

You have requested a ruling that the applicable distribution period for the Retirement
Accounts is to be calculated based on the life expectancy of Daughter, as the
designated beneficiary of the Subtrust in accordance with sections 1.401(a)(9)-4, Q&A-5
and 1.401(a)(9)-5, Q&A-5. Because the Retirement Accounts each list the Subtrust as
the beneficiary, we must determine whether the requirements of a “see-through” trust
under section 1.401(a)(9)-4, Q&A-5, have been met with respect to the Subtrust. The
documentation you provided establish that requirements 1, 2, and 4 of section
1.401(a)(9)-4, Q&A-5, have been met (the trust is valid and irrevocable and
documentation has been provided). The third requirement - that the beneficiary or
beneficiaries be identifiable within the trust document - must also be met in order to “see
through” the Subtrust as beneficiary and find that Daughter is the sole designated
beneficiary of the Retirement Accounts within the meaning of section 1.401(a)(9)-4,
Q&A-1.

The determination of whether the Subtrust qualifies as a “see-through” trust depends on
whether the beneficiaries of the Subtrust can be identified at the time of Decedent’s
death. Article 6.4.4 of the Trust provides Daughter with a testamentary general power
of appointment. This power of appointment generally applies to any accumulation of
Retirement Account distributions that will accumulate in the Subtrust. However, when
read together, Articles 6.1 and 6.4.1 of the Subtrust require Trustee to pay to Daughter
any and all funds in the Subtrust withdrawn by the Trustee, including the minimum
distributions required under section 401(a)(9), during Daughter’s lifetime.1

Therefore, there can be no accumulation of Retirement Account distributions in the
Subtrust for the benefit of any other beneficiary. Because Daughter is the only
beneficiary named in the Subtrust, all beneficiaries with respect to the Subtrust’s
interest in the Retirement Accounts are identifiable within the meaning of section
1.401(a)(9)-4, Q&A-1 from the trust instrument. Accordingly, the Subtrust satisfies the
requirements of a “see through” trust under section 1.401(a)(9)-4, Q&A-5. In addition,
since Daughter was the sole designated beneficiary of the Retirement Accounts on
Decedent’s date of death and remained a beneficiary on September 30, of the calendar
year following the calendar year of the Decedent’s death, she is the designated
beneficiary of the Retirement Accounts for purposes of section 1.401(a)(9)-4, Q&A-1.


1
    A court order issued by Court on Date 4 is consistent with this conclusion.

PLR-108823-17                                  7

Pursuant to the provisions of sections 1.401(a)(9)-5, Q&A-5(b) and 1.401(a)(9)-5, Q&A-
5(c), if an employee dies before his or her required minimum distributions are required
to be distributed and payments are made to a nonspouse designated beneficiary, the
required minimum distributions are based on the life expectancy of the designated
beneficiary with the shortest life. Accordingly, the required minimum distributions with
regard to the Retirement Accounts are to be calculated based on the life expectancy of
Daughter, the sole designated beneficiary of the Subtrust.

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 Retirement Accounts were properly
combined into an IRA held within the Subtrust Accounts.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2017-1, 2017-1 I.R.B. 1,
§ 7.01(15)(b). This office has not verified any of the material submitted in support of the
request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2017-1, § 11.05.

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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited 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.

PLR-108823-17                                 8

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                       Sincerely,



                                       Jason E. Levine
                                       Senior Technician Reviewer
                                       Qualified Plans Branch 4
                                       Office of the Associate Chief Counsel
                                       Tax Exempt and Government Entities