Non-qualified trust as beneficiary of an IRA

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FIREchief
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Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

I have a question for our estate planning experts. I understand the world of qualified trusts as designated beneficiaries of qualified retirement assets (i.e. tIRA, Roth, 401k, etc.). They have provided a means for a person's heirs to benefit from stretch payouts over the heir's lifetime by being structured so that the IRS can "look through" the trust and treat the trust beneficiary as an individual for purposes of the stretch. This thread is not about this.

My question is about a non-qualified trust being designated the beneficiary of a decedent's qualified account, for the benefit of a non-spouse heir. I've been reading the IRS documentation, and would like some confirmation that I am understanding this correctly.

Scenario 1) "Joe" dies at age 69 (i.e. before reaching his required beginning date - RBD) and names his non-qualified trust as beneficiary of the IRA. The trustee will need to withdraw all assets from the IRA prior to the end of the fifth year following Joe's death. The trustee can wait until December of that year without incurring a penalty. If any funds remain in the sixth year, there is a 50% IRS penalty.

Scenario 2) "Joe" dies at age 75. He has passed his RBD and his remaining life expectancy as of the year of his death is 13.4. The trustee will use 12.4 (13.4 years - 1) to determine the RMD for the year following Joe's death. Each year after, he will subtract one from the prior year's life expectancy to determine the next RMD. This will effectively stretch the IRA withdrawals over 13 years without incurring any IRS penalties.

Is this correct? Thanks.

(Edited to correct Scenario #2 RMD calculations)
Last edited by FIREchief on Mon Dec 23, 2019 7:06 pm, edited 2 times in total.
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Re: Non-qualified trust as beneficiary of an IRA

Post by David Jay »

Stretch IRA rules will change (I.e. Stretch IRAs will go away) in a matter of hours as the SECURE act gets signed into law. Wait a couple of days and we can discuss.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

Scenario #1 - Death prior to RBD
Death prior to 1/1/2020 - correct, the 5 year rule applies, and a direct rollover to an IRA is not allowed. A qualified plan will require a lump sum distribution, therefore any IRS penalty is immaterial. An inherited IRA can be held by the trust for the 5 years.

Death in 2020 or later - same as above except 10 years has replaced the 5 year rule. No direct rollover permitted and plan will require a lump sum distribution. If an IRA was inherited, it could be held up to 10 years.

*************************************
Scenario #2 - Death after RBD

Death prior to 1/1/2020 - not quite correct. The decedent's age IN the year of death is used to determine the initial divisor - therefore 13.4. However,
the year of death RMD is that of the decedent, so 13.4 less 1.0 is only used to generate the first beneficiary year RMD divisor, which would be 12.4.
Then reduce that by 1.0 for each successive year. This is per IRS rules, but again, no direct rollover to an inherited IRA is allowed, and almost all plans will require a lump sum distribution within a short time. An inherited IRA could be stretched for the roughly 13 years.

Death in 2020 or later - There are no annual RMDs, but while the IRS would allow the account to be held for up to 10 years, however as is the case above almost all plans will require a lump sum distribution within a short time.

Scenario #2 is treated in the same manner as if the participant's estate inherited the plan.

In other words, there is no way to transfer a qualified plan with a NQ trust beneficiary to an inherited IRA. References to an inherited IRA apply only when the plan owner has an IRA account.

NOTE: My understanding of the Secure Act provisions signed into law today are preliminary until I get a chance to review it in detail. So take the explanations for deaths after 2019 with a grain of salt.
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Re: Non-qualified trust as beneficiary of an IRA

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Alan S. wrote: Fri Dec 20, 2019 11:12 pm Scenario #1 - Death prior to RBD
Death prior to 1/1/2020 - correct, the 5 year rule applies, and a direct rollover to an IRA is not allowed. A qualified plan will require a lump sum distribution, therefore any IRS penalty is immaterial. An inherited IRA can be held by the trust for the 5 years.

Death in 2020 or later - same as above except 10 years has replaced the 5 year rule. No direct rollover permitted and plan will require a lump sum distribution. If an IRA was inherited, it could be held up to 10 years.
I think you may have missed my point (or perhaps I misunderstand something). This is specifically for a NON-qualified trust. Yes, the IRA can only be held in trust for five years, but can the proceeds of liquidating the IRA be held within the trust indefinitely without penalty? I'm familiar with proposed legislation, but that has nothing to do with my post because there appears to be no proposed changes to the treatment of a beneficiary who is not a "designated beneficiary," (i.e. not an individual).
Scenario #2 - Death after RBD

Death prior to 1/1/2020 - not quite correct. The decedent's age IN the year of death is used to determine the initial divisor - therefore 13.4. However,
the year of death RMD is that of the decedent, so 13.4 less 1.0 is only used to generate the first beneficiary year RMD divisor, which would be 12.4.
Then reduce that by 1.0 for each successive year. This is per IRS rules, but again, no direct rollover to an inherited IRA is allowed, and almost all plans will require a lump sum distribution within a short time. An inherited IRA could be stretched for the roughly 13 years.

Death in 2020 or later - There are no annual RMDs, but while the IRS would allow the account to be held for up to 10 years, however as is the case above almost all plans will require a lump sum distribution within a short time.
Thanks for the clarification for determining the divisor. I admittedly didn't spend a lot of time nailing that down. I specifically specified the scenario, where a non-qualified trust is the recipient of the IRA withdrawals where, and this is the key point, the drafter of the trust can disregard all requirement for a qualified trust. In other words, they can just invest the IRA withdrawals into a trust owned account and move on with life.
Scenario #2 is treated in the same manner as if the participant's estate inherited the plan.
Bingo!! Thanks Alan. This is exactly what I was poking at. The trust is named the beneficiary and has 5 or "x" number of years to withdraw the IRA assets without penalty. Do you see where I'm heading with this..... ???
Last edited by FIREchief on Sun Dec 22, 2019 9:40 pm, edited 5 times in total.
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Re: Non-qualified trust as beneficiary of an IRA

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David Jay wrote: Fri Dec 20, 2019 11:01 pm Stretch IRA rules will change (I.e. Stretch IRAs will go away) in a matter of hours as the SECURE act gets signed into law. Wait a couple of days and we can discuss.
Please don't try to get my thread locked. As I just explained in another response, this has nothing to do with any pending legislation. I'll certainly get involved in those threads, but this is about something totally unaffected by any pending legislation. I've read the current bills and also reviewed IRC 401(a)(9) and the questions I have posed are outside of any proposed changes. You need to understand the differences between "beneficiary," "designated beneficiary" and "eligible designated beneficiary" to fully comprehend the questions I'm asking in this thread. 8-)
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Re: Non-qualified trust as beneficiary of an IRA

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Alan S. wrote: Fri Dec 20, 2019 11:12 pm This is per IRS rules, but again, no direct rollover to an inherited IRA is allowed, and almost all plans will require a lump sum distribution within a short time.
Just to clarify, are you saying that if a decedent's IRA was held by a custodian such as Fidelity, that FIDO would not allow the estate (or, similarly a non-qualified trust) to withdraw the assets over the maximum time period allows by the IRS. Why would this be? What would be the business reason for forcing closure of a profitable account?
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Re: Non-qualified trust as beneficiary of an IRA

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I now see that the SECURE act provisions have become law. Again, this has nothing to do with this thread, other than the fact that I now believe that in some scenarios a non-qualified trust can be named beneficiary of qualified retirement plan assets in a manner that will provide more benefit than a qualified retirement plan trust with associated complexities and limitations.

The SECURE act text specifically addressed only those scenarios where an "individual" (in the eyes of the IRS) was named beneficiary.
IN GENERAL.—Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)— ‘‘(I) shall be applied by substituting ‘10 years’ for ‘5 years’, and...
A non-qualified trust does not appear to be a "designated beneficiary" due to:
DESIGNATED BENEFICIARY.—The term ‘designated beneficiary’ means any individual designated as a beneficiary by the employee.
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Re: Non-qualified trust as beneficiary of an IRA

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FIREchief wrote: Fri Dec 20, 2019 11:50 pm
David Jay wrote: Fri Dec 20, 2019 11:01 pm Stretch IRA rules will change (I.e. Stretch IRAs will go away) in a matter of hours as the SECURE act gets signed into law. Wait a couple of days and we can discuss.
Please don't try to get my thread locked. As I just explained in another response, this has nothing to do with any pending legislation. I'll certainly get involved in those threads, but this is about something totally unaffected by any pending legislation. I've read the current bills and also reviewed IRC 401(a)(9) and the questions I have posed are outside of any proposed changes. You need to understand the differences between "beneficiary," "designated beneficiary" and "eligible designated beneficiary" to fully comprehend the questions I'm asking in this thread. 8-)
Sorry, I was not trying to get it locked, I was trying to say: “if you wait just a few hours, we can discuss all the changes. Those changes, especially with respect to Scenario 2, are a big deal”
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

FIREchief wrote: Fri Dec 20, 2019 11:47 pm

Thanks for the clarification for determining the divisor. I admittedly didn't spend a lot of time nailing that down. That said, I never suggested rollover to an inherited IRA. I specifically specified the opposite scenario, where a non-qualified trust is the recipient of the IRA withdrawals where, and this is the key point, the drafter of the trust can disregard all requirement for a qualified trust. In other words, they can just invest the IRA withdrawals into a trust owned account and move on with life.

Bingo!! Thanks Alan. This is exactly what I was poking at. There is no inherited IRA. The trust is named the beneficiary and has 5 or "x" number of years to withdraw the IRA assets without penalty. Do you see where I'm heading with this..... ???
I think so. In some cases "x" years will be longer than 10 years, therefore a longer stretch if the decedent is under 80. In that case, even if the trust is drafted to be qualified, if the trustee fails to provide the plan custodian with the trust details by 10/31 of the following year, the trust will not be treated as qualified. The trustee of the trust could apply this option.

However, this would only work for inherited IRAs because a qualified plan with a NQ trust beneficiary will require a lump sum distribution.
Is this what you are asking?
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Re: Non-qualified trust as beneficiary of an IRA

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David Jay wrote: Sat Dec 21, 2019 9:52 am
FIREchief wrote: Fri Dec 20, 2019 11:50 pm
David Jay wrote: Fri Dec 20, 2019 11:01 pm Stretch IRA rules will change (I.e. Stretch IRAs will go away) in a matter of hours as the SECURE act gets signed into law. Wait a couple of days and we can discuss.
Please don't try to get my thread locked. As I just explained in another response, this has nothing to do with any pending legislation. I'll certainly get involved in those threads, but this is about something totally unaffected by any pending legislation. I've read the current bills and also reviewed IRC 401(a)(9) and the questions I have posed are outside of any proposed changes. You need to understand the differences between "beneficiary," "designated beneficiary" and "eligible designated beneficiary" to fully comprehend the questions I'm asking in this thread. 8-)
Sorry, I was not trying to get it locked, I was trying to say: “if you wait just a few hours, we can discuss all the changes. Those changes, especially with respect to Scenario 2, are a big deal”
No worries. My point is that I don't believe that the scenarios I've suggested have anything to do with the secure act (based upon my reading both the secure act changes and the affected sections of IRC 401(a)(9). IMHO, the secure act kills most of the benefits of any stretching for a non-spousal heir; and there may no longer be much or any value in applying the needed restrictions to an accumulation trust to ensure that it "qualifies" as an individual in the eyes of the IRS. I'm envisioning a flavor of an accumulation trust that is not qualified, meaning that it can be much more liberal with powers of appointment and non-individual beneficiaries (both primary and successor). I'm hoping that in this thread we can discuss this and better understand the opportunities and limitations of such a tool. Hopefully Bruce will share his expert opinions.
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Re: Non-qualified trust as beneficiary of an IRA

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Alan S. wrote: Sat Dec 21, 2019 11:32 am
FIREchief wrote: Fri Dec 20, 2019 11:47 pm

Thanks for the clarification for determining the divisor. I admittedly didn't spend a lot of time nailing that down. That said, I never suggested rollover to an inherited IRA. I specifically specified the opposite scenario, where a non-qualified trust is the recipient of the IRA withdrawals where, and this is the key point, the drafter of the trust can disregard all requirement for a qualified trust. In other words, they can just invest the IRA withdrawals into a trust owned account and move on with life.

Bingo!! Thanks Alan. This is exactly what I was poking at. There is no inherited IRA. The trust is named the beneficiary and has 5 or "x" number of years to withdraw the IRA assets without penalty. Do you see where I'm heading with this..... ???
I think so. In some cases "x" years will be longer than 10 years, therefore a longer stretch if the decedent is under 80. In that case, even if the trust is drafted to be qualified, if the trustee fails to provide the plan custodian with the trust details by 10/31 of the following year, the trust will not be treated as qualified. The trustee of the trust could apply this option.

However, this would only work for inherited IRAs because a qualified plan with a NQ trust beneficiary will require a lump sum distribution.
Is this what you are asking?
Thanks Alan. I think you understand my original questions. I'll need to research how my custodian would handle an IRA that lists a non-qualified trust as primary beneficiary. Semantics and inconsistent definitions of terms like "inherited IRA" will likely be a challenge. It may not matter in the end, as long as the resulting account (whatever it is called) is drawn down per the requirements for a non-individual beneficiary. Even if the IRS audited and declared the trust non-qualified, I can't see where there would be any penalties. Also, currently custodians are calibrated to establish inherited IRA's to support IRS requirements for a lifetime stretch. With the new law, they'll be making some changes and some of those may spill over into the scenario I've described; especially when folks figure out that (hopefully) a 71 - 79 year old decedent may be able to provide his/her non-spouse heir with a longer stretch by using a non-qualified trust instead of a qualified trust or direct inheritance of the account by the individual. It doesn't make perfect sense, but that's really not what we expect out of Washington. :D
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Re: Non-qualified trust as beneficiary of an IRA

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I did a bit of research on Fidelity's website. It appears that they will allow an inherited IRA to be opened and owned by any of the following:
a) spouse
b) person other than spouse
c) entity
d) estate
e) trust

The verbiage for trust seems to assume that a "look through" trust is desired, however it doesn't appear to rule out ownership of an inherited IRA by a non-qualified trust:

https://www.fidelity.com/retirement-ira ... ur-choices
If the trust is intended to comply with the IRS look-through trust rules to satisfy RMD requirements, we require certification from the trustee that the trust meets the look-through requirement and instruction from the trustee on how to distribute the IRA.
I'm reading the use of the word "if" to suggest that it's not a requirement. As I suggested earlier, the custodian may not really care (other than reminding the trustee of the IRS requirements for qualification). Beyond that, it's likely between the IRS and the trustee to ensure that taxes are being paid correctly. Regardless, it doesn't appear that the term "inherited IRA" in any way implies that it is limited to individual beneficiaries or will require near term lump sum distributions. I'm thinking that my OP is mostly accurate at this point, but will welcome additional thoughts and discussions. Thanks.
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Re: Non-qualified trust as beneficiary of an IRA

Post by JBTX »

As an offshoot to the secure scenario - let's take a Roth IRA, and what is best way to pass it on to younger non spouse heir :

1. Put it in an accumulation trust, upon which the ira has to be distributed in 10 years, in this case back into the trust

2. Make a non qualified trust as beneficiary of the Roth ira - upon on which it will have to be distributed back into the non qualified trust within 5 years (does it have to be distributed out of the ira in this scenario, or also out of the trust?)

The disadvantage of having a non qualified trust as heir to a Roth IRA may not be nearly as big as it used to be.
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Re: Non-qualified trust as beneficiary of an IRA

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JBTX wrote: Sat Dec 21, 2019 4:48 pm As an offshoot to the secure scenario - let's take a Roth IRA, and what is best way to pass it on to younger non spouse heir :

1. Put it in an accumulation trust, upon which the ira has to be distributed in 10 years, in this case back into the trust

2. Make a non qualified trust as beneficiary of the Roth ira - upon on which it will have to be distributed back into the non qualified trust within 5 years (does it have to be distributed out of the ira in this scenario, or also out of the trust?)

The disadvantage of having a non qualified trust as heir to a Roth IRA may not be nearly as big as it used to be.
I actually have ran this through a spreadsheet. Example as follows:

Ten year Secure Act payout (to a qualified trust) versus Five year payout (to a non-qualified trust):
Assumptions:
Initial Roth balance = $1M
Real rate of return = 6%
Dividend yield = 2%
Capital gains rate = 15%
All dividends are immediately distributed to a beneficiary (i.e. none are subject to trust tax rates)
No after tax investments are sold (i.e. they accumulate future tax liability within the trust)

Qualified trust with Secure act year ten Roth withdrawal – 30 year outcome:
Final value: $4.8M
Remaining in trust: $3.8M
Remaining tax liability: $0.4M ($375K)

Non-qualified trust with year five Roth withdrawal – 30 year outcome:
Final Value: $4.6M
Remaining in trust: $3.4M
Remaining tax liability: $0.4M ($425K)

I find these results intriguing, especially for anyone concerned with the IRS acceptance of accumulation trusts. The actual "cost" of using a non-qualified trust over thirty years is 2.6% ($122K in the example provided).

I've been mostly concerned with Natalie Choate's recommended O/R-2-NLP (outright to now living person - chapter 6 in her book) approach to accumulation trusts. I believe that Bruce has previously suggested that this is the "conservative approach" with respect to IRS compliance (please weigh in Bruce if I've misquoted you). The idea is that the trust should at some point in the chain of beneficiaries require an outright payout to a person considered living at the time that the Grantor passes. I believe that a non-qualified trust can be drafted to not only require residual funds be passed in trust, but also that will provide a power of appointment to the primary beneficiary to transfer trust assets to other trusts, entities or individuals. In other words, much more flexibility that may have more value than that 2.6% years or decades in the future.

I can easily plug in and report other assumptions as requested.
Last edited by FIREchief on Sun Dec 22, 2019 9:47 pm, edited 1 time in total.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

FIREchief wrote: Sat Dec 21, 2019 3:38 pm I did a bit of research on Fidelity's website. It appears that they will allow an inherited IRA to be opened and owned by any of the following:
a) spouse
b) person other than spouse
c) entity
d) estate
e) trust

The verbiage for trust seems to assume that a "look through" trust is desired, however it doesn't appear to rule out ownership of an inherited IRA by a non-qualified trust:

https://www.fidelity.com/retirement-ira ... ur-choices
If the trust is intended to comply with the IRS look-through trust rules to satisfy RMD requirements, we require certification from the trustee that the trust meets the look-through requirement and instruction from the trustee on how to distribute the IRA.
I'm reading the use of the word "if" to suggest that it's not a requirement. As I suggested earlier, the custodian may not really care (other than reminding the trustee of the IRS requirements for qualification). Beyond that, it's likely between the IRS and the trustee to ensure that taxes are being paid correctly. Regardless, it doesn't appear that the term "inherited IRA" in any way implies that it is limited to individual beneficiaries or will require near term lump sum distributions. I'm thinking that my OP is mostly accurate at this point, but will welcome additional thoughts and discussions. Thanks.
Since qualified plans are subject to penalties for RMD failures and are able to force out RMDs, it seems logical that the 10/31 trust documentation requirement accomplished by certification and summary by the trustee of the trust would be more thorough than that of an IRA custodian. It certainly appears that a trust drafted to perfection with respect to look through could instantly be rendered NQ by the trustee intentionally failing to provide adequate response to the certification requirement, and that said trustee could keep their options open right up to 10/31 when the documentation is due. The plan or IRA custodian should not care whether the trust is qualified, they just want the RMDs to be correctly determined. Actually, this is much simpler if the trust is NQ since the RMD variables (income beneficiaries etc) do not apply.

I am not aware if there are any benefits of a qualified trust in addition to a longer applicable distribution period for RMDs, which was not always the case if the income beneficiary was very old, and with the Secure Act changes, the benefits of qualification will apparently have more exceptions than before.

Custodians are very litigation adverse for obvious reasons, which is why many of them have certain restrictions. Expenses of dealing with multiple beneficiaries and the accounts being wasting assets result in inherited plans often being viewed negatively by plan administrators. In some cases they are probably looking for reasons to make a single lump sum distribution to a trust or estate and call it a day.
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Re: Non-qualified trust as beneficiary of an IRA

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Alan S. wrote: Sat Dec 21, 2019 7:34 pm I am not aware if there are any benefits of a qualified trust in addition to a longer applicable distribution period for RMDs, which was not always the case if the income beneficiary was very old, and with the Secure Act changes, the benefits of qualification will apparently have more exceptions than before.
Thanks Alan. This is exactly what I am thinking. :sharebeer Even in the absence of such "exceptions," I'm just no longer seeing the compelling case for drafting a qualified accumulation trust for non-spouse beneficiaries, especially in light of IRS uncertainties in this realm. Hopefully we'll gain some more perspectives as this thread lives on. 8-)
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Re: Non-qualified trust as beneficiary of an IRA

Post by samsmith »

Just want to be clear. PRIOR to the secure act the “stretch “ option for taking RMDs was available for non-spouse individual beneficiaries. It was also available for well drafted trusts that were able to comply with certain rules that allowed identification of a specific individual for purposes of determining a life to use for RMDS. A trust that did not meet this requirement had to take distributions in 5 years.

With secure act, stretch is now replaced by 10 year rule for individuals. Are you saying that the 5 year rule still applies to a trust if it does not meet the criteria of being a “see-through “ trust? And if a trust does meet the criteria for being a see-through trust than it gets 10 years? So the 5 year rule is still applicable in certain circumstances? What if the estate is the IRA beneficiary? Is it still 5 years ?
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Re: Non-qualified trust as beneficiary of an IRA

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samsmith wrote: Sun Dec 22, 2019 10:10 am Just want to be clear. PRIOR to the secure act the “stretch “ option for taking RMDs was available for non-spouse individual beneficiaries. It was also available for well drafted trusts that were able to comply with certain rules that allowed identification of a specific individual for purposes of determining a life to use for RMDS.
I believe that this is correct.
A trust that did not meet this requirement had to take distributions in 5 years.
My understanding is that this is correct if the decedent had not reached the required beginning date RBD (the date when an original account owner is required to begin taking RMDs). For those past the RBD, the non-qualified entity, estate or non-qualified trust could utilize the remaining life expectancy of the original account owner. Now that the RBD is moving to 72 years of age, this would mean that if a person dies at that time, the beneficiary of the inherited IRA could use the remaining life expectancy, which may exceed ten years. I believe that Alan S. has already confirmed this (see below). He is more an expert than I am (as are many others on the forum, who may weigh in as well).
With secure act, stretch is now replaced by 10 year rule for individuals. Are you saying that the 5 year rule still applies to a trust if it does not meet the criteria of being a “see-through “ trust? And if a trust does meet the criteria for being a see-through trust than it gets 10 years? So the 5 year rule is still applicable in certain circumstances? What if the estate is the IRA beneficiary? Is it still 5 years ?
As I mentioned above, I believe that 5 years is the worse case scenario. This is somewhat new territory for discussion, since it was so much of a "no brainer" to aim for the lifetime stretch prior to this point. That paradigm has radically shifted with the Secure act's passage. I had done some homework and decided to get a thread started to make certain I wasn't missing something significant. At this point, I don't think I am, but we're still waiting for our estate attorneys to weigh in. It's likely that they are doing a deep dive to fully understand things before offering any opinions.

Alan S. wrote: Sat Dec 21, 2019 11:32 am
FIREchief wrote: Fri Dec 20, 2019 11:47 pm I specifically specified the opposite scenario, where a non-qualified trust is the recipient of the IRA withdrawals where, and this is the key point, the drafter of the trust can disregard all requirement for a qualified trust. In other words, they can just invest the IRA withdrawals into a trust owned account and move on with life.

The trust is named the beneficiary and has 5 or "x" number of years to withdraw the IRA assets without penalty. Do you see where I'm heading with this..... ???
I think so. In some cases "x" years will be longer than 10 years, therefore a longer stretch if the decedent is under 80. In that case, even if the trust is drafted to be qualified, if the trustee fails to provide the plan custodian with the trust details by 10/31 of the following year, the trust will not be treated as qualified. The trustee of the trust could apply this option.
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Re: Non-qualified trust as beneficiary of an IRA

Post by dalmatiandan »

Following this thread with interest.

We have a minor child and a look-through revocable living trust as successor beneficiary to our retirement plans (for benefit of the minor and any future children of ours).

From the discussion, I have not been able to glean whether the “stretch-IRA” provisions in our appropriately-worded trust will still be satisfactory.

Or is the “stretch-IRA” dead now altogether, qualified or non-qualified trust?

Dan
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

Note these provisions in the explanation of RMDs under Secure:
Change in after-death rules for defined contribution plans

The proposal changes the after-death required minimum distribution rules applicable to defined contribution plans, as defined, with respect to required minimum distributions to designated beneficiaries. A defined contribution plan for this purpose means an eligible retirement plan (qualified retirement plans, section 403(b) plans, governmental section 457(b) plans, and IRAs) other than a defined benefit plan.

Ten-year after-death rule for defined contributions plans
In general
Under the proposal, the five-year rule is expanded to become a 10-year period instead of five years (“10-year rule”), such that the 10-year rule is the general rule for distributions to designated beneficiaries after death (regardless of whether the employee (or IRA owner) dies before, on, or after the required beginning date) unless the designated beneficiary is an eligible beneficiary as defined in the proposal. Thus, in the case of an ineligible beneficiary, distribution of the employee (or IRA owner’s) entire benefit is required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

Eligible beneficiaries
For eligible beneficiaries, an exception to the 10-year rule (for death before the required beginning date under present law) applies whether or not the employee (or IRA owner) dies before, on, or after the required beginning date. The exception (similar to present law) generally
allows distributions over life or life expectancy of an eligible beneficiary beginning in the year following the year of death. Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee (or IRA owner),
is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee (or IRA owner), or is a child of the employee (or IRA owner) who has not reached the age of majority. In the case of a child who has not reached the age of majority, calculation of the minimum required distribution under this exception is only allowed through the year that the child reaches the age of majority.

Therefore, it appears what we have left is:
1) No change to non individual beneficiaries - still 5 year rule for death prior to RBD and decedent's remaining LE for deaths after RBD
2) Designated beneficiaries - 10 year rule regardless of when participant passed
3) "Eligible beneficiaries" - (formerly called designated beneficiaries) - no change, full LE Stretch

When the "eligible beneficiary" passes, the successor beneficiary is subject to the 10 year rule. They cannot continue the eligible beneficiary's RMD schedule.
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Re: Non-qualified trust as beneficiary of an IRA

Post by bsteiner »

dalmatiandan wrote: Sun Dec 22, 2019 3:06 pm Following this thread with interest.

We have a minor child and a look-through revocable living trust as successor beneficiary to our retirement plans (for benefit of the minor and any future children of ours).

From the discussion, I have not been able to glean whether the “stretch-IRA” provisions in our appropriately-worded trust will still be satisfactory.

Or is the “stretch-IRA” dead now altogether, qualified or non-qualified trust?

Dan
Outright to the minor would get the stretch while he/she is a minor, and he/she would have to take the balance within 10 years after attaining majority.

A leading authority (whose name I don't want to mention publicly since the person's comments were private) thinks that a conduit trust for a minor should get the stretch while the beneficiary was a minor (as if it were payable to the minor outright), and then the balance would have to be distributed within 10 years after the beneficiary attained majority. If that's correct (which remains to be seen), I don't know whether the trust would have to remain conduit (i.e., the balance paid out to the former minor within 10 years after attaining majority), or whether the trust could become discretionary once the beneficiary attained majority.

It's only been two days since the new law was signed, and everyone has been busy on year-end planning matters. I'm sure that over time we'll know more.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

It seems that RMDs to the trust based on the oldest trust beneficiary, used to be problematic when the beneficiary was older. Now, even if a minor was the oldest, the 10 year rule kicks in at majority. However, if the trust beneficiaries included someone within 10 years of age of the IRA owner, the oldest trust beneficiary would then be an "eligible beneficiary" with a full LE stretch.

Are we looking at a reversal where the longer stretch will be generated by having older trust beneficiaries?
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

bsteiner wrote: Sun Dec 22, 2019 4:32 pm It's only been two days since the new law was signed, and everyone has been busy on year-end planning matters. I'm sure that over time we'll know more.
Thanks Bruce. I'm looking forward to your further perspectives as the knowledge base grows. :beer
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Alan S. wrote: Sun Dec 22, 2019 4:45 pm It seems that RMDs to the trust based on the oldest trust beneficiary, used to be problematic when the beneficiary was older. Now, even if a minor was the oldest, the 10 year rule kicks in at majority. However, if the trust beneficiaries included someone within 10 years of age of the IRA owner, the oldest trust beneficiary would then be an "eligible beneficiary" with a full LE stretch.

Are we looking at a reversal where the longer stretch will be generated by having older trust beneficiaries?
It really is strange. It sounds like I can name my cousin who is 9.9 years younger than me as my primary beneficiary, and the payouts will be stretched for my LE + 9.9. Or, I can name a non-qualified trust (that could have my favorite charity, my dog and my 100 year old Grandpa as beneficiaries), and as long as I am older than the RBD at death; it will be stretched for my LE (which could easily exceed ten years). Finally, I can jump through the IRS hoops to establish a qualified accumulation trust for my actual adult child, and the stretch would be ten years. I appreciate your continuing inputs. :beer
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Re: Non-qualified trust as beneficiary of an IRA

Post by JBTX »

Alan S. wrote: Sun Dec 22, 2019 4:13 pm Note these provisions in the explanation of RMDs under Secure:
Change in after-death rules for defined contribution plans

The proposal changes the after-death required minimum distribution rules applicable to defined contribution plans, as defined, with respect to required minimum distributions to designated beneficiaries. A defined contribution plan for this purpose means an eligible retirement plan (qualified retirement plans, section 403(b) plans, governmental section 457(b) plans, and IRAs) other than a defined benefit plan.

Ten-year after-death rule for defined contributions plans
In general
Under the proposal, the five-year rule is expanded to become a 10-year period instead of five years (“10-year rule”), such that the 10-year rule is the general rule for distributions to designated beneficiaries after death (regardless of whether the employee (or IRA owner) dies before, on, or after the required beginning date) unless the designated beneficiary is an eligible beneficiary as defined in the proposal. Thus, in the case of an ineligible beneficiary, distribution of the employee (or IRA owner’s) entire benefit is required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

Eligible beneficiaries
For eligible beneficiaries, an exception to the 10-year rule (for death before the required beginning date under present law) applies whether or not the employee (or IRA owner) dies before, on, or after the required beginning date. The exception (similar to present law) generally
allows distributions over life or life expectancy of an eligible beneficiary beginning in the year following the year of death. Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee (or IRA owner),
is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee (or IRA owner), or is a child of the employee (or IRA owner) who has not reached the age of majority. In the case of a child who has not reached the age of majority, calculation of the minimum required distribution under this exception is only allowed through the year that the child reaches the age of majority.

Therefore, it appears what we have left is:
1) No change to non individual beneficiaries - still 5 year rule for death prior to RBD and decedent's remaining LE for deaths after RBD
2) Designated beneficiaries - 10 year rule regardless of when participant passed
3) "Eligible beneficiaries" - (formerly called designated beneficiaries) - no change, full LE Stretch

When the "eligible beneficiary" passes, the successor beneficiary is subject to the 10 year rule. They cannot continue the eligible beneficiary's RMD schedule.

It seems like it says the 10 years replaces 5 year. Do you see anywhere that indicates that 5 years is still the rule for non qualified entities?

I heard a podcast where the lawyer guy said the 10 year replaces the 5 year. However he could have been mistaken.
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Re: Non-qualified trust as beneficiary of an IRA

Post by JBTX »

Also, it wasn't obvious to me until I read it or heard it somewhere, but if you do have a conduit trust in your estate plan, you really need to get it looked at sooner rather than later (and make sure not to die before you get it fixed). If you die on 1/2/2020 and ira assets go to conduit trust, it is irrevocable and theres nothing you can do about it. One article mentioned depending on how the trust is worded it may explicitly say it is to distribute on an RMD schedule. Since there is no longer an applicable RMD schedule it may just sit there and all distribute at the end of year 10 and create a tax bomb for larger amounts. Or something that.

Again IANAL nor do I play one on TV.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Lastrun »

JBTX wrote: Mon Dec 23, 2019 10:46 am One article mentioned depending on how the trust is worded it may explicitly say it is to distribute on an RMD schedule.
Indeed, I cannot imagine such a rigid trust. Seems like some possible scare mongering.

Despite a conduit provision to distribute the RMD to the beneficiaries, the Trustee could pull other amounts from the IRA at any time during the 10 year period, and most trusts would allow discretionary distributions to the beneficiaries during the 10 year period. So I think the tax bomb would either be trustee neglect or very rigid and atypical trust provisions.
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Re: Non-qualified trust as beneficiary of an IRA

Post by bsteiner »

JBTX wrote: Mon Dec 23, 2019 10:46 am Also, it wasn't obvious to me until I read it or heard it somewhere, but if you do have a conduit trust in your estate plan, you really need to get it looked at sooner rather than later (and make sure not to die before you get it fixed). If you die on 1/2/2020 and ira assets go to conduit trust, it is irrevocable and theres nothing you can do about it. One article mentioned depending on how the trust is worded it may explicitly say it is to distribute on an RMD schedule. Since there is no longer an applicable RMD schedule it may just sit there and all distribute at the end of year 10 and create a tax bomb for larger amounts. ...
...
Conduit trusts rarely made sense even under the old law, but for some reason there are a fair number of them out there.

IRA owners who have them should (where appropriate) fix them. Since they probably didn't make sense before, they may want to review the rest of their estate plan at the same time, since there may be other things that should be fixed.

If an IRA owner dies with a conduit trust, it may be possible to fix it by judicial modification (many states allow judicial modification for changed circumstances or to meet the settlor's tax objectives) or by nonjudicial settlement (some states allow modification by agreement of the interested parties), or by reformation.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

JBTX wrote: Mon Dec 23, 2019 10:46 am Also, it wasn't obvious to me until I read it or heard it somewhere, but if you do have a conduit trust in your estate plan, you really need to get it looked at sooner rather than later (and make sure not to die before you get it fixed). If you die on 1/2/2020 and ira assets go to conduit trust, it is irrevocable and theres nothing you can do about it. One article mentioned depending on how the trust is worded it may explicitly say it is to distribute on an RMD schedule. Since there is no longer an applicable RMD schedule it may just sit there and all distribute at the end of year 10 and create a tax bomb for larger amounts. Or something that.

Again IANAL nor do I play one on TV.
That's right - this came from Jeff Levine writing for Michael Kitces: https://www.kitces.com/blog/secure-act- ... nrollment/
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

For participants in collectively bargained qualified plans, there is a 2 year deferral period for the RMD rules of Secure to take effect. In other words, Secure does not apply to deaths prior to 1/1/2022 for these plans. Many 403b and 457b plans are collectively bargained, as is the TSP.

Current articles on the Secure Act are focusing only on the changes, not what did not change. Since some trusts are not qualified at the end of the day (10/31 of the year following year of death) for various reasons, they will not have either a designated beneficiary (10 years) or an eligible beneficiary (LE stretch) to determine the RMD. They would still be treated as an entity without a life expectancy, meaning the 5 year rule remains in place for those trusts, as well as the remaining LE of the decedent for deaths after the RBD.

For such NQ trusts, a qualified plan will still require a lump sum distribution in almost all cases, and these trusts are not eligible for a direct rollover to an inherited IRA to avoid the lump sum distribution.
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Re: Non-qualified trust as beneficiary of an IRA

Post by MtnBiker »

Alan S. wrote: Sun Dec 22, 2019 4:45 pm It seems that RMDs to the trust based on the oldest trust beneficiary, used to be problematic when the beneficiary was older. Now, even if a minor was the oldest, the 10 year rule kicks in at majority. However, if the trust beneficiaries included someone within 10 years of age of the IRA owner, the oldest trust beneficiary would then be an "eligible beneficiary" with a full LE stretch.

Are we looking at a reversal where the longer stretch will be generated by having older trust beneficiaries?
I started a new thread to discuss the impact (if any) on the length of the stretch for eligible beneficiaries, such as disabled individuals with Special Needs Trusts. See: viewtopic.php?f=10&t=298332
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Alan S. wrote: Mon Dec 23, 2019 11:46 am For such NQ trusts, a qualified plan will still require a lump sum distribution in almost all cases, and these trusts are not eligible for a direct rollover to an inherited IRA to avoid the lump sum distribution.
Alan: would you please elaborate on this? Are you saying that if I have an IRA at Fidelity, and I name a non-qualified trust as 100% primary beneficiary, that Fidelity will NOT allow that IRA to be directly transferred (not "rolled over") into an inherited IRA owned by my non-qualified trust? That would seem to contradict what I am seeing on the Fidelity website.
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Lastrun wrote: Mon Dec 23, 2019 11:18 am
JBTX wrote: Mon Dec 23, 2019 10:46 am One article mentioned depending on how the trust is worded it may explicitly say it is to distribute on an RMD schedule.
Indeed, I cannot imagine such a rigid trust. Seems like some possible scare mongering.
It could happen. Some folks have desired conduit trusts in order to guarantee that the withdrawals were delayed as long as possible (e.g. to ensure that their heirs aren't able to pull out the entire balance to spend frivolously). That worked when there was a lifetime stretch. Not so much with a ten year sunset.
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Re: Non-qualified trust as beneficiary of an IRA

Post by JBTX »

https://www.google.com/amp/s/www.thestr ... w-you-save
The SECURE Act also eliminated the so-called “stretch” IRA in favor of the “10-year rule” and this could have grave tax consequences for retirement account owners who have named a conduit trust as the beneficiary of their IRA, especially if the trust calls for the trustee to distribute only the RMDs to the beneficiary of the trust.
“The stretch is essentially gone for everyone except for exempted groups, including surviving spouses,” said Hopkins. “The way that the Act is drafted actually says all of the (inherited retirement) account must be distributed by the end of your 10 following the year of death.”
So, what does that mean? It means the owner of an inherited IRA is not required to take RMDs in years one through nine after the retirement account dies. “There is no required minimum distribution under the SECURE Act for inherited accounts until year 10. So, if your trust as that language where you only have access to the RMD, it could lock up those retirement accounts for a decade before the beneficiary has any access to the money.”


And then, he said, the “disaster part” is that the entire account is distributed as a taxable distribution in one year. “There’s nothing you would be able to do about that trust because it set in stone at that point,” said Hopkins. “It's an irrevocable trust.”
According to Hopkins, some people will die next year with those trusts in place and the beneficiary will expect to receive RMDs, but the trust company or trustee won’t be able to distribute any money for 10 years. “That's going to be an absolute disaster,” he said
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Re: Non-qualified trust as beneficiary of an IRA

Post by Lastrun »

Are you all saying that professionals are drafting conduit trusts that both (a) restrict the power of the trustee to withdraw amounts from the IRA and receive only the RMDs, and (b) only allow the trustee to distribute the RMD to the beneficiary. I can see the latter (b), but can't imagine (a). Distinguishing between a withdrawal from the IRA, and a distribution to the beneficiary.

Here is a sample provision from Ms. Choate's work:

Establishing a Conduit Trust for One Beneficiary
See ¶ 6.3.05.
From and after my death, this trust shall be held for the benefit of [NAME OF INDIVIDUAL TRUST BENEFICIARY] (hereinafter referred to as the “Beneficiary”). Each year, beginning with the year of my death, my trustees shall withdraw from any Deferrable Retirement Benefit the Minimum Required Distribution for such Deferrable Retirement Benefit for such year, plus such additional amount or amounts as the trustee deems advisable in its discretion. All amounts so withdrawn (net of expenses properly charged thereto) shall be distributed to the Beneficiary, if the Beneficiary is then living. Upon the death of the Beneficiary (or upon my death if the Beneficiary does not survive me) all remaining property of this trust [here insert the provisions that will apply after the conduit beneficiary’s death; since the see-through trust rules “do not care” what these provisions say, they can be anything you want. Examples: “shall be paid to [NAME OF REMAINDER BENEFICIARY],” or “shall be held in further trust pursuant to the provisions of Article [NUMBER] of this trust instrument.”].
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Lastrun wrote: Mon Dec 23, 2019 7:21 pm Are you all saying that professionals are drafting conduit trusts that both (a) restrict the power of the trustee to withdraw amounts from the IRA and receive only the RMDs, and (b) only allow the trustee to distribute the RMD to the beneficiary. I can see the latter (b), but can't imagine (a). Distinguishing between a withdrawal from the IRA, and a distribution to the beneficiary.
I believe that a conduit trust must distribute all amounts withdrawn from the IRA immediately to the primary trust beneficiary. Otherwise, it would be an accumulation trust (and would have to meet the additional IRS requirements). Are you suggesting otherwise or am I misunderstanding what you wrote?
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Re: Non-qualified trust as beneficiary of an IRA

Post by Lastrun »

FIREchief wrote: Mon Dec 23, 2019 7:37 pm I believe that a conduit trust must distribute all amounts withdrawn from the IRA immediately to the trust beneficiary. Otherwise, it would be an accumulation trust (and would have to meet the additional IRS requirements).
Yes correct, this is the essence of the "see through" But my issue is with the 10 year tax bomb concern floating around. If the conduit trustee has an unlimited power of withdrawal from the IRA, at any time and amount, in addition to the RMD amount, the trustee can plan for the 10 year tax bomb, and is not limited by the lack of an RMD, as these authors are alluding to.
JBTX wrote: Mon Dec 23, 2019 6:12 pm So, if your trust as that language where you only have access to the RMD, it could lock up those retirement accounts for a decade before the beneficiary has any access to the money.”
Who drafts a trust this way? ---that limits both the trustee's right to withdraw amounts in excess of the RMD from the IRA, and limits the trustee's distribution authority to the beneficiary from the trust share to the RMD amount. Both powers (withdrawal and distribution) would have to be so limited to have an "explosion" in year 10.

FIREchief, I am also intrigued by your post above concerning, in a 10 year scenario, whether it is worth it to jump through the hoops of an accumulation trust, versus just having a non-qualified trust subject to the 5 year rule. I need to think about this one.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

FIREchief wrote: Mon Dec 23, 2019 1:26 pm
Alan S. wrote: Mon Dec 23, 2019 11:46 am For such NQ trusts, a qualified plan will still require a lump sum distribution in almost all cases, and these trusts are not eligible for a direct rollover to an inherited IRA to avoid the lump sum distribution.
Alan: would you please elaborate on this? Are you saying that if I have an IRA at Fidelity, and I name a non-qualified trust as 100% primary beneficiary, that Fidelity will NOT allow that IRA to be directly transferred (not "rolled over") into an inherited IRA owned by my non-qualified trust? That would seem to contradict what I am seeing on the Fidelity website.
No, not saying that. I am only referring to a NQ trust as the beneficiary of an employer plan such as a 401k, 403b, etc. An IRA owner that names a NQ trust as beneficiary already results in the beneficiary having an inherited IRA for the trust's interest. Of course, such an inherited IRA can also be transferred by direct trustee transfer to any other IRA custodian desired. This is why it has always been the case that if the plan owner is going to mess up and allow their estate to become the beneficiary, they are much better off doing this with an IRA account, and not a qualified employer plan, since that would subject the inherited QRP to a lump sum distribution.

The Secure Act is going to create some confusion in stating that the new limited stretch provisions apply to DC plans. This is yet another example of the tax code (and the IRS) defining terms in different ways for different provisions in the code. Until the Secure Act no one thought of an IRA being treated as a DC plan, but the following paragraph states that an IRA is to be so treated:
(iv) APPLICATION TO CERTAIN ELIGIBLE RETIREMENT PLANS.—For purposes of applying the provisions of this subparagraph in determining amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in section 402(c)(8)(B), other than a defined benefit plan described in clause (iv) or (v) thereof or a qualified trust which is a part of a defined benefit plan) shall be treated as a defined contribution plan.”.
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Alan S. wrote: Mon Dec 23, 2019 8:22 pm
FIREchief wrote: Mon Dec 23, 2019 1:26 pm
Alan S. wrote: Mon Dec 23, 2019 11:46 am For such NQ trusts, a qualified plan will still require a lump sum distribution in almost all cases, and these trusts are not eligible for a direct rollover to an inherited IRA to avoid the lump sum distribution.
Alan: would you please elaborate on this? Are you saying that if I have an IRA at Fidelity, and I name a non-qualified trust as 100% primary beneficiary, that Fidelity will NOT allow that IRA to be directly transferred (not "rolled over") into an inherited IRA owned by my non-qualified trust? That would seem to contradict what I am seeing on the Fidelity website.
No, not saying that. I am only referring to a NQ trust as the beneficiary of an employer plan such as a 401k, 403b, etc. An IRA owner that names a NQ trust as beneficiary already results in the beneficiary having an inherited IRA for the trust's interest. Of course, such an inherited IRA can also be transferred by direct trustee transfer to any other IRA custodian desired. This is why it has always been the case that if the plan owner is going to mess up and allow their estate to become the beneficiary, they are much better off doing this with an IRA account, and not a qualified employer plan, since that would subject the inherited QRP to a lump sum distribution.
Thanks!! Is this a good reason to roll over 401k assets to an individual IRA as soon as possible? (my state provides robust asset protection for IRAs, so loss of the ERISA protections would not be an issue unless we moved to a non-asset protection state)
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

If you are naming a NQ trust, yes. But even if you are naming an individual beneficiary, you should consider how likely they might be to fail to name their own beneficiary. If they do not and their estate inherits the plan, there will be a lump sum distribution.
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Lastrun wrote: Mon Dec 23, 2019 8:06 pm FIREchief, I am also intrigued by your post above concerning, in a 10 year scenario, whether it is worth it to jump through the hoops of an accumulation trust, versus just having a non-qualified trust subject to the 5 year rule. I need to think about this one.
Also, as a clarification, the non-qualified trust would only be subject to the 5 year rule if the decedent had not reached his/her RBD (which I believe will now be April 1 of the year following the year the decedent turns 72). For a decedent who was past their RBD, the trust RMDs would be based upon the decedent's age. Two examples to illustrate:

Joe reaches age 72 during 2020. His RBD is April 1, 2021. He dies during 2021 after April 1. The trustee of his non-qualified trust will subtract 1 from his Table I life expectancy (15.5) to determine an RMD factor of 14.5 to use in determining the Trust’s RMD for 2022. The trust will withdraw all inherited IRA funds by the end of 2036, a fifteen year stretch.

Joe dies in 2028 (age 80). The trustee of his non-qualified trust will subtract 1 from his Table I life expectancy (10.2) to determine an RMD factor of 9.2 to use in determining the Trust’s RMD for 2029. The trust will withdraw all inherited IRA funds by the end of 2038, a ten year stretch.

Keep in mind that this example ten year stretch would not be as desirable as the new ten year rule for non-eligible designated beneficiaries in many situations, since it is a level draw down versus an option to withdraw all funds at the end of year ten.
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

https://www.ataxplan.com/

A bit of commentary from one of the true experts, Natalie Choate, that seems to support some of our thinking in this thread:
Why this is important: Under new IRS actuarial tables that will take effect in 2021 (they were
proposed by the IRS in November 2019), a participant’s “remaining life expectancy” will be longer
than 10 years if the participant dies between approximately ages 73 and 80. Thus, if the “longer of”
rule is NOT continued, we will have the surely-not-intended result of DBs being worse off than
nonDBs if the participant dies during that time period.....and the unseemly sight of practitioners
scrambling to disqualify their “see-through trusts” to enable the beneficiary to take advantage of the
nonDB rule.
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Re: Non-qualified trust as beneficiary of an IRA

Post by Alan S. »

She's the expert, but I don't see why "practitioners" need to scramble.

They have drafted a qualified trust, but subject to the trustee meeting the "Halloween Rule" 10/31 deadline to provide the trust info to the IRA custodian. Therefore, if the trustee desires a longer distribution period (death between 73 and 80), they can just withhold this info until 10/31 passes. The trust will then be considered non qualified, and the remaining LE of the decedent will apply instead of the 10 year rule. There is no need to pay to have the trust re done due to Secure.

But given the advantage of annual distribution flexibility with the 10 year rule, the trustee might consider submitting the trust info starting for deaths at age 78 or 79. That triggers the 10 year rule as the trust will be qualified, but the lack of an annual RMD may provide a benefit in high income years which might offset the need to drain the IRA a couple years earlier.

Of course, if the IRS maintains the "longer than" provision for deaths after the RBD, the above action won't be needed.
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Re: Non-qualified trust as beneficiary of an IRA

Post by FIREchief »

Alan S. wrote: Wed May 20, 2020 8:48 pm She's the expert, but I don't see why "practitioners" need to scramble.

They have drafted a qualified trust, but subject to the trustee meeting the "Halloween Rule" 10/31 deadline to provide the trust info to the IRA custodian. Therefore, if the trustee desires a longer distribution period (death between 73 and 80), they can just withhold this info until 10/31 passes. The trust will then be considered non qualified, and the remaining LE of the decedent will apply instead of the 10 year rule. There is no need to pay to have the trust re done due to Secure.

But given the advantage of annual distribution flexibility with the 10 year rule, the trustee might consider submitting the trust info starting for deaths at age 78 or 79. That triggers the 10 year rule as the trust will be qualified, but the lack of an annual RMD may provide a benefit in high income years which might offset the need to drain the IRA a couple years earlier.

Of course, if the IRS maintains the "longer than" provision for deaths after the RBD, the above action won't be needed.
That all makes sense. I was just encouraged to see one more acknowledgment that, in some situations, a non-qualified trust may now serve the beneficiary better than a qualified trust. That's really what this thread is about. It is certainly a paradigm shift, and one that may not sink in with marginal estate planners for years (if ever).
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