Trust named as IRA beneficiary is a "see-through" trust, so payouts stretch over the surviving spouse's life

Plain-English summary

A person died before reaching age 70 1/2, leaving six IRAs whose sole beneficiary was their revocable living trust. The trust became irrevocable at death and channeled the retirement assets into a subtrust for the surviving spouse, who could demand distributions during life, with anything left going to the couple's two children after the spouse's death. Normally only a human being can be a "designated beneficiary" for the required-minimum-distribution rules, and naming a trust would force a fast payout. But under Treas. Reg. § 1.401(a)(9)-4, Q&A-5, the beneficiaries of a qualifying "see-through" trust are treated as the designated beneficiaries if four conditions are met (valid trust, irrevocable at death, identifiable beneficiaries, and required paperwork). The IRS ruled the trust met all four, so the individual beneficiaries are treated as designated beneficiaries. Only the spouse and the two children are counted (later potential recipients are mere successors), and because the spouse has the shortest life expectancy of that group, the IRS ruled the required minimum distributions from the IRAs are calculated over the spouse's life expectancy. The pre-2020 rules applied because the death predated the SECURE Act's effective date.

Ruling snapshot

• Question: Do the beneficiaries of a trust named as an IRA beneficiary count as designated beneficiaries under § 401(a)(9), and is the payout period measured by the surviving spouse's life expectancy?
• Outcome: Approved (both rulings granted)
• Key authorities: IRC § 401(a)(9); IRC § 408(a)(6); Treas. Reg. § 1.401(a)(9)-4, Q&A-5; Treas. Reg. § 1.401(a)(9)-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202044001 Third Party Communication: None
Release Date: 10/30/2020 Date of Communication: Not Applicable
Index Number: 401.06-02, 401.00-00,
403.04-06, 408.02-01 Person To Contact:
---------------, ID No. -----------------
--------------------------------------- Telephone Number:
------------------------------------------------ --------------------
-------------------------------- Refer Reply To:
------------------------------------- CC:EEE:EB:QP3
In Re: ---------------------------------------------------- PLR-104073-20
----------------------------- Date:
August 03, 2020

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

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

Subtrust = --------------------------------------------------

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

Spouse = ---------------

Individual A = -----------------

Individual B = ---------------

IRA 1 = -------------------------------------------------------------------------
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IRA 2 = -------------------------------------------------------------------------
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IRA 3 = -------------------------------------------------------------------------
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IRA 4 = -------------------------------------------------------------------------
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IRA 5 = -------------------------------------------------------------------------
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IRA 6 = -------------------------------------------------------------------------
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PLR-104073-20 2

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

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

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

This letter is in response to your request for a letter ruling submitted by your authorized
representative and received on December 23, 2019, regarding the applicable
distribution period under section 401(a)(9) of the Internal Revenue Code and its
corresponding Treasury Regulations.

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

Decedent established Trust (a living revocable trust), on Date 1. Decedent maintained
six IRAs: IRA 1, IRA 2, IRA 3, IRA 4, IRA 5 and IRA 6 (Decedent’s IRAs). The Trust is
the sole named beneficiary of each of Decedent’s IRAs. Decedent died on Date 2, prior
to attaining age 70½, at which time Trust became irrevocable. Trust is valid under the
laws of State.

The terms of Trust establish Subtrust to hold assets from Decedent’s retirement
accounts, including Decedent’s IRAs. The terms of Subtrust provide that the trustee
must pay income and principal from Subtrust to Spouse, from time to time, as the
trustee deems appropriate. However, at any time, Spouse may require the trustee to
distribute as much of Subtrust’s assets as Spouse demands. The terms of Subtrust
also provide that upon the death of Spouse, Individual A and Individual B (the children
of Spouse and Decedent), are entitled to any remaining Subtrust assets. If either
Individual A or Individual B predeceases Spouse, his or her share is divided between
living descendants of Individual A or Individual B, as applicable. At the time of
Decedent’s death, Decedent was survived by Spouse, Individual A, Individual B, and
grandchildren.

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

1) The beneficiaries of Trust will be treated as designated beneficiaries of Decedent’s
IRAs for purposes of determining the applicable distribution period under section
401(a)(9).

2) Pursuant to the provisions of section 1.401(a)(9)-4, Q&A-5, the applicable
distribution period for Decedent’s IRAs will be calculated based on the life expectancy of
Spouse.
PLR-104073-20 3

Law

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.

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 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 70½.

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 five 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 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 (I) the calendar year in which the employee
turns age 70½, 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.
PLR-104073-20 4

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 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
section 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.

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.
PLR-104073-20 5

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 section 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 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.

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.

With respect to your first ruling request, based on your representations, Trust meets
the four requirements of section 1.401(a)(9)-4, Q&A-5. As a result, the beneficiaries of
Trust are treated as designated beneficiaries of Decedent’s IRAs for purposes of
determining the applicable distribution period under section 401(a)(9).

With respect to your second ruling request, Spouse, Individual A, and Individual B are
the only beneficiaries taken into account for purposes of determining the applicable
distribution period. Spouse is taken into account as a designated beneficiary because
he is entitled to receive distributions of income and principal from Subtrust during his
lifetime and is able to require the trustee to distribute to him as much of Subtrust’s
PLR-104073-20 6

assets as he demands. Individual A and Individual B are designated beneficiaries
because they are entitled to any remaining Subtrust assets upon Spouse’s death. All
other potential recipients of the funds in Subtrust are mere successor beneficiaries
within the meaning of the regulations.

Spouse has the shortest life expectancy of the designated beneficiaries taken into
account in determining the applicable distribution period. Accordingly, the applicable
distribution period for calculating the required minimum distributions from Decedent’s
IRAs is based on Spouse’s life expectancy.

Rulings

1) The beneficiaries of Trust will be treated as designated beneficiaries of Decedent’s
IRAs for purposes of determining the applicable distribution period under section
401(a)(9).

2) Pursuant to the provisions of section 1.401(a)(9)-4, Q&A-5, the applicable
distribution period for Decedent’s IRAs will be calculated based on the life expectancy
of Spouse.

This letter ruling expresses no opinion on the property rights of the parties under state
law, and only provides rulings on the impact of federal tax law on the specific facts
presented. This letter ruling assumes that Decedent’s IRAs satisfy the requirements of
section 408 at all relevant times.

The rulings contained in this letter are based upon information and representations
submitted on behalf of Trust and accompanied by a penalties 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 a letter 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.

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 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.
PLR-104073-20 7

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,



                                      John T. Ricotta
                                      Branch Chief
                                      Qualified Plans Branch 3
                                      Office of Associate Chief Counsel
                                      Employee Benefits, Exempt
                                      Organizations, and Employment
                                      Taxes

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