Sarah Brenner, JD
Director of Retirement Education
The recent final required minimum distribution (RMD) regulations include a new rule change that may be beneficial for IRA owners who name trusts as beneficiaries. In the new regulations, the IRS allows separate accounting for RMD purposes for more trusts. This can be helpful when a trust has beneficiaries who can potentially have different payout periods under the RMD rules.
Separate Accounting
When an IRA with multiple beneficiaries is split into separate inherited accounts for each beneficiary by December 31 of the year following the year of death, this is considered “separate accounting.” The RMD rules will then apply separately to each inherited IRA. For example, one beneficiary might be eligible to use a life expectancy payout on their inherited IRA while another would be required to use the 10-year rule. Without separate accounting – all of the beneficiaries would have to use the fastest payout method.
In the past, while separate accounting was allowed for multiple beneficiaries named directly on an IRA, it was never permitted for trusts. In many private letter rulings, when a single trust was named as the beneficiary and that trust was to split into three separate sub-trusts, the IRS allowed separate inherited IRAs to be created, one for each sub-trust, but did not allow separate account treatment for RMD purposes. To get around this issue, IRA owners could name separate trusts directly on the beneficiary form. In these situations, the IRS allowed the beneficiaries of sub-trusts to each use their own life expectancy. The difference was that each sub-trust was named as the beneficiary on the IRA beneficiary form, rather than the master trust.
The SECURE Act changed these rules in a limited way. It allowed separate accounting for certain special needs trusts called “applicable multi-beneficiary trusts.” While the SECURE Act limits most beneficiaries to a 10-year payout, special rules for these trusts for disabled or chronically ill beneficiaries allow RMDs to be paid from the IRA to the trust using the beneficiary’s single life expectancy, even if the trust has other beneficiaries who are not disabled or chronically ill.
New Rules
The final regulations expand this treatment beyond “applicable multi-beneficiary trusts” to permit separate accounting to be used for other see-through trusts – if certain requirements are met. Separate accounts may be used for “see-through” trusts if the terms of the trust provide that it is to be divided immediately upon the death of the account holder into separate shares for one or more trust beneficiaries.
To be considered “immediately divided upon death,” the following requirements must be met:
- the trust must be terminated;
- the separate interests of the trust beneficiaries must be held in separate trusts;
- and, there can be no discretion as to the extent to which the separate trusts will be entitled to receive post-death distributions.
In addition, the final regulations clarify that a trust will not fail the requirement to be “divided immediately upon death” if there are administrative delays, as long as any amounts received by the trust during the delay are allocated as if the trust had been divided on the date of the IRA owner’s death.