Tax-deferred retirement accounts, such as individual retirement accounts and tax-qualified employer-sponsored retirement accounts, must make required minimum distributions (RMDs), including after the death of the employee or account owner.1 Typically, RMDs may be made over the life expectancy of the account’s death beneficiary, provided that the beneficiary meets the definition of “designated beneficiary.”
Designated beneficiary status is conferred only on individuals. When a trust is named as an IRA’s beneficiary, an individual beneficiary of that trust can qualify as the IRA’s designated beneficiary. If there’s more than one trust beneficiary who might receive the proceeds of the trust’s inherited IRA, RMDs must be made based on the life expectancy of the eldest.
Well-drafted trusts provide for successor beneficiaries should a trust beneficiary die during the term of trust administration. To avoid even the most remote risk that a trust will have no beneficiary, it’s not uncommon for a trust to provide that, if there’s no living descendant of the trustor, state law succession provisions will apply.
For example, under the Uniform Probate Code (UPC), if there are no living descendants, the decedent’s property passes to the decedent’s parents. If no parent is living, the property passes to the parents’ issue. If there’s no living issue, the property passes to the grandparents, or if none, to the issue of the grandparents. The list goes on, and it only continues to expand across family lines. California’s law, for example, is similar to the UPC.2
In many cases, it’s highly unlikely that one or more possible trust beneficiaries will actually ever receive a trust distribution, including a distribution of IRA proceeds received by the trust. But, when it comes to applying RMD regulations, there’s no guidance saying that a trust beneficiary can be disregarded when there’s only a remote chance of receiving a dollar of trust-held retirement benefits.
Private Letter Rulings
PLRs have analyzed trusts, but they’re inconsistent.
For example, in PLR 200228025 (July 12, 2002), an IRA owner named a trust as beneficiary of four IRAs. The IRA owner died before reaching her required beginning date. The decedent’s grandchildren, both minors, were beneficiaries of that trust. Distributions to the grandchildren could be made in the discretion of the trustee for their support, health and maintenance until age 30. Each beneficiary’s share of trust corpus was to be distributed to each beneficiary on attaining that age. If either beneficiary died before age 30, that beneficiary’s share passed to the surviving beneficiary. But, if both beneficiaries died before age 30, their 67-year-old uncle would receive all remaining trust corpus. The Internal Revenue Service held that RMDs could be made to the trust. Because it was possible for IRA principal to be accumulated for the uncle, and because his life expectancy was the shortest of all beneficiaries who might receive IRA proceeds, the IRS ruled that, because the uncle was the oldest potential beneficiary, his life expectancy was to be used for purposes of determining RMDs.
The PLR doesn’t say how old the children are, but, according to IRS actuarial tables, the probability that a person aged 67 would survive, say, a 15-year-old, is 1.608%. Yet, the IRS refused to disregard the uncle, a highly improbable taker, from consideration.
In PLR 201633025 (Aug. 12, 2016), a trust was named as beneficiary of the decedent’s IRAs. The IRA custodian consolidated the accounts into a single inherited IRA held for the benefit of the trust. The decedent was survived by her child, two grandchildren by that child and two siblings. The trust provided for mandatory payments of trust income to the child. Discretionary payments for health, education, support or maintenance could be made to the child or to either grandchild. The trustee had made discretionary distributions to the child.
At age 50, the trust was to terminate in favor of the child. But, if the child died before reaching age 50, the trust was to terminate and distribute all of its property to the grandchildren. If neither grandchild survived the decedent’s child, the trust was to be distributed to a charity. Ignoring completely the contingent charity interest, the IRS held that, because the decedent’s child was the oldest of the three individual beneficiaries, the child was the designated beneficiary for purposes of making RMDs.
This PLR stands in contrast to PLR 200228025. The former took into account a trust beneficiary whose chances of receiving retirement account proceeds were negligible; the latter did the opposite.
Amendment Needed
The statute specifically grants the Secretary of the Treasury authority to promulgate regulations relating to RMDs after the death of the employee.3 Under that authority, Treasury regulations define who’s a designated beneficiary, stating:
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 beneficiary designated as such under the plan is an individual who is entitled to a portion of an employee’s benefit, contingent on the employee’s death or another specified event … A designated beneficiary need not be specified by name in the plan or by the employee to 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 members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible, to identify the class member with the shortest life expectancy. The fact that an employee’s interest under the plan passes to a certain individual under a will or otherwise under applicable state law does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan ….4
That regulation should be amended to preclude giving in regard to a trust beneficiary whose chances of receiving the proceeds of a distribution from that trust’s inherited retirement account are so remote as to be negligible.
Treasury has promulgated several regulations (other than those relating to retirement plan benefits) containing a provision allowing a charitable income tax deduction even if a non-charitable benefit might occur, when the likelihood of the occurrence of such an event is so remote as to be negligible.5 It’s notable that charitable deduction regulations include such a likelihood test because that deduction is an example of a statute that must be strictly construed.6
To clarify the treatment of RMDs, the earlier quoted regulation should be amended to add a provision such as:
For this purpose, an individual who is designated as a beneficiary under the plan shall be disregarded if the possibility that such individual will receive any portion of any distribution from the plan is so remote as to be negligible. A possibility is so remote as to be negligible if it can be ascertained by actuarial standards that there is less than a 5% probability that such beneficiary will receive any portion of the proceeds of any distribution from the plan participant’s account.
The IRS should also provide the procedure for determining that probability. For example, the IRS could publish guidance in the form of a revenue procedure indicating that such probability is determined using actuarial tables contained in Publication 1457.
Applying that approach to PLR 200228025, we’re told the uncle was aged 62 and that both children were minors. Assuming, for the sake of example, the eldest child is 20, the probability that an individual aged 62 will survive an individual aged 20 is 2.063%, according to IRS’ actuarial tables. There’s an even smaller probability that the 62 year old will survive both children. Because that probability is under 5%, the uncle should be disregarded, as the likelihood that he’ll get any trust distribution is so remote as to be negligible. In that case, RMDs should be based on the elder grandchild’s attained age in the year following the year when the participant died.
Appropriate guidance that’s similar to several other existing regulations based on standard actuarial factors will eliminate inconsistent results and will likely reduce the continuing need for PLRs when it comes to retirement death benefits payable to a trust.
Endnotes
1. Internal Revenue Code Section 401(a)(9).
2. California Probate Code Section 6402. See also Uniform Probate Code Section 203 (2018).
3. IRC Section 401(a)(9)(A)(ii).
4. Treasury Regulations Section 1.401(a)(9)-4, Q&A 1.
5. For example, see the following Treas. Regs. Sections: 1.170A-1; 1.170A-7; 1.170A-14; 1.276-1; 1.642(c)-2; 1.679-2; 20.2055-2; 25.2518-3; 25.2522(a)-2; 25.2522(c)-3; 26.2612-1; and 26.2632-1.
6. See, for example, Green v. United States, 880 F.3d 519 (10th Cir. 2018), citingHelvering v. Bliss, 293 U.S. 144 (1934).