No Second Chances for Faulty IRA Trusts
Topics in Legal News 2010/09/06 17:34
Postmortem wealth transfers to IRA beneficiaries continues to present estate planning challenges. Although perhaps not the final word on the matter, the IRS now prevents postmortem trust reformation designed to allow trustees to treat them as designated beneficiary trusts. The relevant ruling is PLR 201021038.
The broadness of the limited power of appointment was perhaps the most critical flaw in the subject trust. It was too broad to be able to determine the correct measuring life. There were other flaws as well, most notably the trust’s naming of charities as potential beneficiaries.
The tax consequences of this ruling are devastating to any similarly-flawed trust: Beneficiaries cannot stretch out required withdrawals over the lifespan of the oldest beneficiary but would presumably have to withdraw all money from the plan within just a few years.
Unless a tax court modifies this ruling – and until it does – the bar is very high indeed for those who draft trusts for the purpose of receiving postmortem IRA distributions. In short, get it right the first time! I would read and reread section 401(a)(9) to ensure the trust conforms to the section’s standards precisely. Going forward, you may also wish to give grantors an opportunity to review the terms of their trusts to ensure they conform with the changing law on this subject. A brief look every three-to-five years is appropriate, although factors like ill health or legal developments with dramatic impact may warrant more frequent reviews.
http://www.marathonlegalblog.com/trackback/14
The broadness of the limited power of appointment was perhaps the most critical flaw in the subject trust. It was too broad to be able to determine the correct measuring life. There were other flaws as well, most notably the trust’s naming of charities as potential beneficiaries.
The tax consequences of this ruling are devastating to any similarly-flawed trust: Beneficiaries cannot stretch out required withdrawals over the lifespan of the oldest beneficiary but would presumably have to withdraw all money from the plan within just a few years.
Unless a tax court modifies this ruling – and until it does – the bar is very high indeed for those who draft trusts for the purpose of receiving postmortem IRA distributions. In short, get it right the first time! I would read and reread section 401(a)(9) to ensure the trust conforms to the section’s standards precisely. Going forward, you may also wish to give grantors an opportunity to review the terms of their trusts to ensure they conform with the changing law on this subject. A brief look every three-to-five years is appropriate, although factors like ill health or legal developments with dramatic impact may warrant more frequent reviews.
http://www.marathonlegalblog.com/trackback/14
