PLR 201633025 Allows for Creativity in Cleanup, but Not for Planning, Says Natalie Choate

PLR 201633025, the IRS was asked to determine the proper applicable distribution period under Internal Revenue Code § 401(a)(9) for payments from an IRA.  Decedent died at age 59 with a trust named as the sole beneficiary of her three (3) IRAs.  After Decedent’s death, the trustee of the beneficiary Trust combined the three (3) IRAs into one inherited IRA for the benefit of the Trust.

Under the terms of the Trust, the Trustee is to distribute all income to the Decedent’s child, with the discretion to distribute principal to the Decedent’s child and/or the Decedent’s grandchildren.  The Trust will terminate when the Decedent’s child attains fifty (50) years of age, at which point the Trust will be distributed to the Decedent’s grandchildren, but such distribution would only be outright if the grandchildren had already attained twenty-one (21) years of age. If the grandchildren died prior to attaining twenty-one (21) years of age, then the IRA would pass to the grandchild’s estate.  If the Decedent’s child and grandchildren are deceased prior to the trust termination date, then the remainder of the Trust is distributed to the Decedent’s siblings, and if the Decedent’s siblings are deceased on the termination date, then the remainder is distributed to various charities.

Since the Decedent’s death, the Trustee has taken minimum required distributions based on the life expectancy of the Decedent’s child.

The IRS found that based on the applicant’s representation, the Trust meets the four requirements of §1.401(a)(9)-4, Q&A-5 and therefore the beneficiaries of Trust are treated as designated beneficiaries of the IRA for purposes of determining the applicable distribution period under section 401(a)(9).  The IRS further provided that only the Decedent’s children and grandchildren were the beneficiaries taken into account for purposes of determining the applicable distribution period, concluding that all other potential recipients of the funds in the Trust are mere successor beneficiaries within the meaning of the regulations.  Because the Decedent’s child had the shortest life expectancy of the three (3) beneficiaries examined for purposes of determining the applicable distribution period, then the applicable distribution period of the Trust is the Decedent’s child’s life expectancy.

This PLR suggests that there is more flexibility to the determination of the applicable distribution period than had previously been acknowledged by the IRS.

What does Natalie Choate think?  She “chalked it up to a ‘mistake by the IRS’ or ‘an unspecified change of IRS policy.’”  Why didn’t the IRS care about the age twenty-one (21) contingency for the grandchildren to take or the fact that the grandchildren’s estates are not countable beneficiaries?

The “moral,” Choate says, is “planning, conservative…cleanup, creative! […] Since the PLR didn’t offer any explanation of how it got to its result or why the grandchildren’s estates (or their great aunts and uncles) were not “countable” beneficiaries, [Choate’s] conclusion was: I can maybe use this ruling in “cleanup mode” (when I’m dealing with a trust that already exists and a participant who is already dead, and trying to get the IRS to accept it as a see-through).”

LISI Employee Benefits and Retirement Planning Email Newsletter #701 (December 10, 2018) at http://www.leimbergservices.com, Copyright 2018 Leimberg Information Services, Inc. (LISI)

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