By Sarah Brenner, JD
Director of Retirement Educations
For trusts that inherited an IRA in 2019, an important deadline is approaching. October 31, 2020 is 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.
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.
Of the four requirements, some 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 attorneys.
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 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 because 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? That would be the trustee of the trust. Not 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 31 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.