Five children may split an inherited IRA while using the oldest child's life expectancy

Plain-English summary

A decedent who had already reached the required beginning date named a
revocable trust as the beneficiary of an IRA. After death, the trust became
irrevocable and divided the remaining property among separate trusts for the
decedent's five children. The IRS ruled that the trust met the requirements
for a see-through trust, so all five children are treated as designated IRA
beneficiaries under IRC § 401(a)(9). Because the regulations do not allow the
trust beneficiaries to use separate-account treatment to determine the payout
period, required minimum distributions must use the life expectancy of the
oldest child. The trustee may nevertheless divide the IRA through
trustee-to-trustee transfers into five separately maintained inherited IRAs,
without creating taxable distributions or rollovers under § 408(d). Each new
IRA may use its individual child's Social Security number for reporting.

Ruling snapshot

• Question: Are the five children designated beneficiaries, and may the
  trustee divide the inherited IRA among separate inherited IRAs tax-free?
• Outcome: Approved
• Key authorities: IRC §§ 401(a)(9) and 408(a)(6), (d); Treas. Reg.
  §§ 1.401(a)(9)-4, -5, and -8; Treas. Reg. §§ 1.408-2 and 1.408-8;
  Rev. Rul. 78-406

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202042012 Third Party Communication: None
Release Date: 10/16/2020 Date of Communication: Not Applicable
Index Number: 401.00-00, 401.06-00,
401.06-02, 408.00-00, Person To Contact:
408.08-00 --------------------, ID No. -----------------
Telephone Number:
-------------------------- -------------------
------------------------ Refer Reply To:
--------------------------- CC:EEE:EB:QP1
--------------------------------------------- PLR-104981-20
Date:
July 22, 2020

Legend:

Decedent = ---------------------
Trust T = --------------------------------------------------------------------------------------
Child A = -----------------
Child B = ---------------
Child C = ---------------
Child D = ----------------------------
Child E = ----------------
State S = -------------
IRA Z = ----------------------------------------------------------------------------------------------
---------------------------------------------------------
IRA X = ----------------------------------------------------------------------------------------------
--------------------------------------------------
Date 1 = -------
Date 2 = -------

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

This is in response to a request for a letter ruling under sections 401(a)(9) and 408 of
the Internal Revenue Code (Code), submitted on behalf of Trust T by its authorized
representative in correspondence dated January 15, 2020, updated by correspondence
dated June 19, 2020.

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

Decedent died in Year 1 after her “required beginning date,” as that term is defined in
section 401(a)(9)(C). Decedent was survived by five children, Child A, Child B, Child C,
Child D, and Child E, all of whom were alive as of the date of this ruling request.
PLR-104981-20 2

Prior to her death, Decedent established Trust T, which has not been amended,
revoked or otherwise changed since the date of her death. The terms of Trust T provide
that Trust T was revocable by Decedent before her death, but irrevocable upon her
death. Trust T is subject to, and is valid under, the laws of State S.

Decedent was the owner of IRA Z, an individual retirement arrangement (IRA). Trust T
was named the beneficiary of IRA Z by means of a beneficiary designation made before
the date of her death. After Decedent’s death, the assets of IRA Z were transferred in a
trustee-to-trustee transfer to IRA X, which is titled as IRA of Decedent (Deceased) f/b/o
Trust T. You have represented that, at all relevant dates since Decedent’s death, IRA Z
and IRA X have been maintained as inherited IRAs of Trust T in accordance with all
applicable tax rules.

On October 31 of Year 2 (the calendar year immediately following Year 1), IRA X’s
custodian was provided with information concerning the terms of Trust T and the
identities of its beneficiaries.

The terms of Trust T provide that at the death of Decedent, the residual balance of the
trust property is to be divided into separate trusts for each of Decedent’s descendants,
per stirpes. Trust T identifies Decedent’s five children as trust beneficiaries. The
residual balance of trust property includes the assets of IRA X.

The trustee of Trust T proposes to separate the assets of IRA X by means of trustee-to-
trustee transfers to five distinct IRAs, each for the separate benefit of one of Decedent’s
five children. Each transferee IRA will be maintained in the name of Decedent
(deceased) for the benefit of the child beneficiary, as beneficiary of Trust T. For
example, one transferee IRA will be maintained in the name of Decedent (deceased) for
the benefit of Child A, as beneficiary of Trust T. Distributions from each of these
transferee IRAs will be made over the life expectancy of Child A, the eldest of
Decedent’s five children. Each transferee IRA will use the Social Security Number of the
individual child beneficiary for reporting purposes.

Based on the facts and representations, the following rulings were requested:

1. Each child beneficiary of Trust T is treated as having been designated as a
   beneficiary of IRA X in accordance with § 1.401(a)(9)-4, Q&A-5, for purposes of
   determining the distribution period under section 401(a)(9). Required minimum
   distributions from IRA X are calculated using the life expectancy of Child A, the oldest
   child beneficiary.

2. The trustee of Trust T may transfer the assets of IRA X by means of trustee-to-
   trustee transfers to IRAs titled IRA of “Decedent (deceased) fbo (name of child
   beneficiary), as beneficiary of Trust T” in order to separate the interest of each child
   beneficiary in the assets of IRA X, without such transfers constituting taxable
   distributions under section 408(d)(1) or rollovers under section 408(d)(3), and each such
   PLR-104981-20 3

inherited IRA may use the Social Security Number of the individual child beneficiary for
reporting purposes.

Law

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)(i) provides that a trust shall not constitute a qualified trust under
the Code unless the plan provides that if the distribution of the employee’s interest has
begun in accordance with section 401(a)(9)(A)(ii), and the employee dies before his
entire interest has been distributed to him, the remaining portion will be distributed at
least as rapidly as under the method being used under section 401(a)(9)(A)(ii) as of the
date of death.

Section 401(a)(9)(C) provides, in relevant part, that the term “required beginning date”
means April 1 of the calendar year following the calendar year in which the employee
attains age 70 ½.

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.
PLR-104981-20 4

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 will be treated as
having been designated as beneficiaries for purposes of determining the distribution
period under section 401(a)(9) 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
the employee’s benefit are identifiable within the meaning of § 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-5(c), provides that, in the case of a trust having more than
one individual beneficiary, § 1.401(a)(9)-5, Q&A-7, applies in determining the
designated beneficiary whose life expectancy will be used to determine the distribution
period. The subsection further provides that the separate account rules under
§ 1.401(a)(9)-8, Q&A-2, are not available to the beneficiaries of a trust with respect to
the trust’s benefit in the employee’s benefit.

Section 1.401(a)(9)-4, Q&A-6(b), provides, in relevant part, with respect to required
minimum distributions after the death of an employee, that documentation sufficient to
enable the plan administrator to identify beneficiaries of the plan must be provided by
the trustee of the trust to the plan administrator by October 31 of the calendar year
immediately following the calendar year in which the employee died.

Section 1.401(a)(9)-5, Q&A-5(a), provides that if an employee dies on or after the
employee’s required beginning date and has a designated beneficiary, the applicable
distribution period for minimum distributions for distribution calendar years after the
distribution calendar year containing the employee’s date of death is the greater of the
life expectancy (determined in accordance with § 1.401(a)(9)-5, Q&A-5(c)) of the
designated beneficiary or the employee.

Section 1.401(a)(9)-5, Q&A-5(c)(1), provides that, with respect to minimum distributions
in any case in which the surviving spouse is not the sole 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
PLR-104981-20 5

year that has elapsed after the calendar year immediately following the calendar year of
the employee’s death.

Section 1.401(a)(9)-5, Q&A-7, provides, in general, that if more than one beneficiary is
designated as a beneficiary with respect to an employee as of the applicable date for
determining the designated beneficiary under A-4 of § 1.401(a)(9)-4, 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)-8, Q&A-2(a)(1), provides that, except as otherwise provided in
Q&A-2, if an employee’s benefit under a defined contribution plan is divided into
separate accounts under the plan, the separate accounts will be aggregated for
purposes of satisfying the rules in section 401(a)(9).

Section 1.401(a)(9)-8, Q&A-2(a)(2), provides that, if the employee’s benefit in a defined
contribution plan is divided into separate accounts and the beneficiaries with respect to
one separate account differ from the beneficiaries with respect to the other separate
accounts of the employee under the plan, for years subsequent to the calendar year
containing the date as of which the separate accounts were established, or date of
death if later, such separate account under the plan is not aggregated with the other
separate accounts under the plan in order to determine whether the distributions from
such separate account under the plan satisfy section 401(a)(9). Instead, the rules in
section 401(a)(9) separately apply to such separate account under the plan. However,
the applicable distribution period for such separate account is determined disregarding
the other beneficiaries of the employee’s benefit only if the separate account is
established on a date no later than the last day of the year following the calendar year
of the employee’s death.

Section 1.401(a)(9)-8, Q&A-3, provides that, for purposes of section 401(a)(9), separate
accounts in an employee’s account are separate portions of an employee’s benefit
reflecting the separate interests of the employee’s beneficiaries under the plan as of the
date of the employee’s death for which separate accounting is maintained. The
separate accounting must allocate all post-death investment gains and losses,
contributions, and forfeitures, for the period prior to the establishment of the separate
accounts, on a pro-rata basis in a consistent and reasonable manner among the
separate accounts.

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 an IRA is maintained.

Section 408(d)(1) provides, generally, that in accordance with the rules of section 72,
amounts paid or distributed from an IRA are included in gross income by the payee or
distributee.
PLR-104981-20 6

Section 408(d)(3) provides an exception to income inclusion under section 408(d)(1) for
certain distributions from an IRA to the individual for whose benefit the IRA is
maintained that are rolled over within 60 days to another IRA for the benefit of that
individual.

Section 408(d)(3)(C) provides that amounts from an inherited IRA cannot be rolled over
into another IRA. Under section 408(d)(3)(C)(ii), an IRA is treated as an inherited IRA if
the individual for whose benefit the IRA is maintained acquired the IRA by reason of the
death of another individual, and such individual is not the surviving spouse of the other
individual.

Section 1.408-2(b)(8) provides that the term beneficiaries on whose behalf an IRA is
established includes (except where the context indicates otherwise) the estate of the
individual, dependents of the individual, and any person designated by the individual to
share in the benefits after the death of the individual.

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 §§ 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 §§ 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.

Revenue Ruling 78-406, 1978-2 C.B. 157, provides that the trustee-to-trustee transfer of
funds from one IRA maintained by an individual to another IRA maintained by the same
individual, even at the direction of that individual, does not constitute a payment or
distribution includible in gross income.

The Further Consolidated Appropriations Act, 2020, P. L. 116-94 (the Act), was enacted
on December 20, 2019. Division O of the Act, titled “Setting Every Community Up for
Retirement Enhancement Act of 2019” (SECURE Act), amended section 401(a)(9) with
respect to individuals who die after December 31, 2019. The amended provisions do not
apply in this case because Decedent died before the applicability date of the SECURE
Act amendments.

Analysis
PLR-104981-20 7

With respect to your first ruling request, § 1.401(a)(9)-4, Q&A-5(c), specifically
precludes the separate account treatment described in § 1.401(a)(9)-8, Q&A-2(a), for
purposes of determining the distribution period under section 401(a)(9), for beneficiaries
of a trust with respect to a trust’s interest as beneficiary of an IRA after the death of the
IRA owner. Accordingly, the child beneficiaries of Trust T with respect to the trust’s
interest in IRA X must all be taken into account for purposes of determining the
applicable distribution period that applies to each transferee IRA for purposes of
section 401(a)(9).

However, because § 1.401(a)(9)-4, Q&A-5(c), is specifically applicable only to the
determination of the distribution period under section 401(a)(9), § 1.401(a)(9)-4,
Q&A-5(c), does not otherwise preclude the creation of separate accounts as described
in § 1.401(a)(9)-8, Q&A-2(a)(2), for beneficiaries of a trust with respect to a trust’s
interest as beneficiary of an IRA after the death of the IRA owner. Accordingly, each
transferee IRA may be maintained separately for purposes of section 401(a)(9) except
for purposes of determining the applicable distribution period.

Accordingly, the child beneficiaries of Trust T will be considered to be designated as
beneficiaries of IRA X for determination of the distribution period under
section 401(a)(9) if Trust T satisfies the requirements of § 1.401(a)(9)-4, Q&A-5(b).

Under the facts, Trust T is the named beneficiary of IRA X. Trust T was established by
Decedent, was valid under the laws of State S, and became irrevocable at the death of
Decedent. In addition, relevant documentation relating to Trust T’s status as beneficiary
of Decedent’s interest in IRA X was given to IRA X’s custodian by the date required
under § 1.401(a)(9)-4, Q&A-6(b). Further, the beneficiaries of Trust T who are
beneficiaries with respect to Trust T’s interest in IRA X are identifiable, within the
meaning of § 1.401(a)(9)-4, Q&A-1, because these beneficiaries are the five children.

The facts indicate that Trust T satisfies the four requirements of § 1.401(a)(9)-4,
Q&A-5(b), to be treated as a “see-through” trust. Therefore, the five child beneficiaries
of Trust T are treated as having been designated as beneficiaries of IRA X for purposes
of section 401(a)(9).

In this case, under § 1.401(a)(9)-5, Q&A-7, because more than one beneficiary is
designated as a beneficiary, the beneficiary with the shortest life expectancy is the
designated beneficiary for purposes of determining the applicable distribution period
under § 1.401(a)(9)-4, A-4. In addition, because Decedent’s surviving spouse is not the
sole beneficiary, the rule of § 1.401(a)(9)-5, Q&A-5(c)(1), applies.

With respect to your second ruling request, the facts indicate that each child beneficiary
intends to accomplish a trustee-to-trustee transfer to separate that beneficiary’s interest
in IRA X. Such transfers will be into five separate IRAs established and maintained in
the name of “Decedent (deceased) fbo (name of child beneficiary), as beneficiary of
Trust T.
PLR-104981-20 8

In this case, consistent with Rev. Rul. 78-406, the portion of IRA X that is, in effect,
maintained in the name of Decedent (deceased) for the benefit of a child beneficiary, as
beneficiary of Trust T is being separated from the portions maintained for the benefit of
the other child beneficiaries and is being transferred to another IRA maintained in the
name of Decedent (deceased) for the benefit of that child beneficiary, as beneficiary of
Trust T, with no other change in title from the transferor IRA to the transferee IRA. The
fact that each child beneficiary’s inherited IRA will use the Social Security Number of the
individual child beneficiary for reporting purposes does not affect this conclusion.

Rulings

Thus, with respect to your ruling requests, we conclude as follows:

1. Each child beneficiary of Trust T is treated as having been designated as a
   beneficiary of IRA X in accordance with § 1.401(a)(9)-4, Q&A-5, for purposes of
   determining the distribution period under section 401(a)(9). Required minimum
   distributions from IRA X are calculated using the life expectancy of Child A, the oldest
   child beneficiary.

2. The trustee of Trust T may transfer the assets of IRA X by means of trustee-to-
   trustee transfers to IRAs titled IRA of “Decedent (deceased) fbo (name of child
   beneficiary), as beneficiary of Trust T” in order to separate the interest of each child
   beneficiary in the assets of IRA X, without such transfers constituting taxable
   distributions under section 408(d)(1) or rollovers under section 408(d)(3), and each such
   inherited IRA may use the Social Security Number of the individual child beneficiary for
   reporting purposes.

This letter assumes that IRA X satisfies the requirements of section 408 at all times
relevant thereto, and that IRA Z satisfied such requirements prior to the transfer of
assets to IRA X. It also assumes that the transferee IRAs to be set up by the child
beneficiaries will also meet the requirements of section 408 at all times relevant thereto.

The rulings contained in this letter are based upon information and representations
submitted by Trust T and accompanied by a penalty of perjury statement executed by
an appropriate party, as specified in Rev. Proc. 2020-1, 2020-1 I.R.B. 1, § 7.01(16)(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. 2020-
1, § 11.05.
PLR-104981-20 9

Except as expressly provided above, no opinion is expressed or implied concerning the
federal income tax consequences of any other aspects of any transaction or item of
income described in this letter ruling.

This letter is directed only to the taxpayer requesting it. Section 6110(k)(3) 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.

                                       Sincerely,



                                       ______________________________
                                       Neil Sandhu
                                       Senior Technician Reviewer
                                       Qualified Plans Branch 1
                                       Office of the Associate Chief Counsel
                                       (Employee Benefits, Exempt Organizations,
                                       and Employment Taxes)

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