Trusts can be used to hold an inherited IRA and still obtain the benefit of the life expectancy of the trust’s beneficiary if certain requirements are met. In PLR 201902023 the IRS ruled that such a result was obtained via the use of a subtrust.

The letter ruling provided the following facts regarding the trust and the associated subtrust:

Decedent established the Trust, a living revocable trust, on Date 1, subsequently amended and restated in its entirety on Date 2. The Trust document establishes a Subtrust to hold the benefits and distributions from any retirement plan, including a traditional individual retirement account (IRA). The Trust and Subtrust are valid under the laws of State X. Decedent died on Date 3, after his required beginning date under section 401(a)(9) and after distributions under the IRA had begun. The Trust and Subtrust became irrevocable upon Decedent’s death.

…The terms of the Trust document governing the Subtrust provide that all property held by the Subtrust will be held, administered, and distributed for the benefit of Beneficiary. The Trust document further states that Beneficiary shall be the sole beneficiary of the Subtrust, and that all retirement benefits distributed to the Trustee, including required minimum distributions, shall be paid directly to the Beneficiary upon receipt by the Trustee, so that the Trustee shall serve as a conduit only. It also states that upon Beneficiary’s death, any tax-qualified retirement plans or accounts, including the remaining assets of the Subtrust, shall be divided equally between and distributed to Decedent’s children or their descendants.

The ruling sought clarification of the proper treatment of the following IRA:

At the time of death, Decedent held an IRA. The IRA adoption agreement, executed on Date 4, names the Trust as the designated beneficiary. Prior to October 31 of the calendar year immediately following the calendar year of Decedent’s death, on Date 5, the Trustee delivered the Trust document for the Trust and Subtrust to the IRA custodian.

When an owner of an IRA dies after passing his/her required beginning date (triggered by obtaining age 70 ½), the account must be distributed over a maximum term generally determined by reference to the life expectancy of the beneficiary. If that beneficiary is not an individual, the entity is deemed to have a zero life expectancy, which limits the option for the slowest distribution to be the remaining life expectancy of decedent, of course presuming that the decedent had not just in fact died. Most often that is a relatively short period.

However, under Reg. §1.409(a)(9)-4 Q&A 5, an option is provided for a trust to “look through” to use the age of its oldest beneficiary. The regulation provides:

Q-5. If a trust is named as a beneficiary of an employee, will the beneficiaries of the trust with respect to the trust’s interest in the employee’s benefit be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9)?

A-5. (a) If the requirements of paragraph (b) of this A-5 are met with respect to a trust that is named as the beneficiary of an employee under the plan, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9).

(b) The requirements of this paragraph (b) are met if, during any period during which required minimum distributions are being determined by treating the beneficiaries of the trust as designated beneficiaries of the employee, the following requirements are met -

(1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus.

(2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.

(3) The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable within the meaning of A-1 of this section from the trust instrument.

(4) The documentation described in A-6 of this section has been provided to the plan administrator.

(c) In the case of payments to a trust having more than one beneficiary, see A-7 of § 1.401(a)(9)-5 for the rules for determining the designated beneficiary whose life expectancy will be used to determine the distribution period and A-3 of this section for the rules that apply if a person other than an individual is designated as a beneficiary of an employee’s benefit. However, the separate account rules under A-2 of § 1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust’s interest in the employee’s benefit.

(d) If the beneficiary of the trust named as beneficiary of the employee’s interest is another trust, the beneficiaries of the other trust will be treated as being designated as beneficiaries of the first trust, and thus, having been designated by the employee under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii), provided that the requirements of paragraph (b) of this A-5 are satisfied with respect to such other trust in addition to the trust named as beneficiary.

The taxpayer was asking for the following rulings:

1) The requirements of section 1.401(a)(9)-4, Q&A-5 are satisfied with respect to the Trust and the Subtrust and therefore the individual Beneficiary of the Subtrust is treated as the designated beneficiary of the IRA for purposes of determining the applicable distribution period under section 401(a)(9); and

2) The applicable distribution period for Decedent’s IRA is to be calculated based on the life expectancy of Beneficiary.

The IRS gave the following responses to the request:

With respect to your first ruling request, you have represented that the Trust is valid and irrevocable and that the required documentation has been provided, in accordance with section 1.401(a)(9)-4, Q&A-5(b)(1), (2), and (4). The Trust document identifies Beneficiary as the sole beneficiary of the Subtrust in accordance with section 1.401(a)(9)-4, Q&A-5(b)(3). In addition, the Trust document requires the Trustee to pay Beneficiary any and all funds in the Subtrust withdrawn by the Trustee, including required minimum distributions under section 401(a)(9), and there can be no accumulation on behalf of any other beneficiary. Therefore, we conclude that the requirements of section 1.401(a)(9)-4, Q&A-5, are met with respect to the Trust and the Subtrust and that the individual Beneficiary of the Subtrust is treated as the sole designated beneficiary of Decedent’s IRA.

With respect to your second ruling request, under section 1.401(a)(9)-5, Q&A-5(a), the applicable distribution period for distribution calendar years after the distribution calendar year containing Decedent’s death is the longer of (i) the remaining life expectancy of Beneficiary determined in accordance with section 1.401(a)(9)-5, Q&A-5(c)(2), and (ii) the remaining life expectancy of Decedent determined in accordance with section 1.401(a)(9)-5, Q&A-5(c)(3). Because Beneficiary’s life expectancy is longer than Decedent’s, the applicable distribution period for Decedent’s IRA is based on the life expectancy of Beneficiary.