We have heard about naming a trust as the beneficiary of your retirement account but how does that beneficiary designation work in real life? Let’s break it down.

Under Private Letter Ruling 202506004 (February 7, 2025), the IRS addressed specific taxpayer’s issues.

The Facts:

A decedent dies after the required beginning date (RBD) to take this taxpayer’s required minimum distributions (RMD). The decedent set up a revocable trust during lifetime and named the trust as the beneficiary of the retirement account.

At the decedent’s death, the trustee was to divide the trust funded account between decedent’s cousins according to a percentage (NONCHARITABLE SHARE) and a charitable organization chosen by the trustee (CHARITABLE SHARE).

In taxpayer’s case, the trustee decides to create a private foundation for the CHARITABLE SHARE.

The trustee would receive a lump sum distribution of cash from the decedent’s IRAs and pay that cash to the private foundation as well as transfer cash to decedent’s cousins for the NONCHARITABLE SHARE.

The transfers MUST be executed as trustee-to-trustee transfers to inherited IRAs to benefit the decedent’s cousins and be titled “Decedent’s name FBO each Cousin”.

The trustee intended to terminate the trust in the same taxable year as the transfers.

The Issues:

IRD Deduction:

Can the trust get a deduction under IRC Section 642(c)(1) equal to the amount of gross income in respect of a decedent (IRD) included in the trust’s gross income due to the lump sum distribution of cash from retirement accounts and distributed to the private foundation in the same taxable year?

IRS RULING # 1: Yes, the trust can take the deduction provided the lump sum to the private foundation was paid within the same taxable year.

Trustee-to-Trustee Transfers:

Will the transfers to the inherited IRAs for the decedent’s cousins result in non-taxable payments under IRC Section 408(d)(1) to the trust?

IRS RULING # 2: Yes, the transfers to the cousins would not be taxable distributions and the IRA custodian must move the inherited funds directly to the inherited IRAs.

Decedents dying after taking RMDs:

Can each individual cousin take the decedent’s RMD from their inherited IRA transferred from the retirement account for the remaining life expectancy of the decedent and will each individual cousin’s inherited IRA be independent of any RMDs taken by other individual beneficiaries?

RMD options available to a trust depend on whether the trust is a “see-through” if:

1. The trust is valid under state law;
2. The trust is irrevocable;
3. The beneficiaries are identifiable;
4. The trust documentation is provided to the IRA custodian or plan trustee by October 31 of year following the year of the IRA owner’s death.

In taxpayer’s case, the trust did not qualify as a see-through because it was not irrevocable at the time it was created and remained revocable until decedent’s death. If a trust remains revocable at the decedent’s death then a non-designated beneficiary is subject to the decedent’s remaining life expectancy.

Because the decedent died after her RBD, distributions to decedent’s non-designated beneficiary (i.e. charity, estate, trust that doesn’t qualify as “see-through”) must be made over decedent’s remaining single life expectancy set in the year of her death and reduced by one for each subsequent year.

Decedent died before 2020, before Secure Act 2019 took effect; however, even if decedent died after 2019, the outcome wouldn’t change for a non-designated beneficiary.

IRS RULING # 3: Each cousin is individually responsible for taking their own RMDs based on the fair market value of their account and include their distribution amounts in their personal income.

Beneficiary tax responsibility:

When the individual beneficiary receives their RMDs will each cousin be responsible for any tax liabilities on their own RMDs for the tax year after the year the inherited IRA was established? Does the trust or trustee have any liability for beneficiaries’ failure to comply?

IRS RULING # 4: Yes, each individual beneficiary will be separately responsible. No, the trust and trustee are not liable for income taxes or excise penalties for the beneficiary’s failure to take their RMDs.

What could have been a better outcome? Decedent naming the cousins individually and not as beneficiaries of the trust. Create the Foundation in a Will or separate trust instrument or form the Foundation during lifetime. Naming the individuals and Foundation as beneficiaries of retirement benefits on beneficiary designation form.

Conclusion:

Remember that an estate plan only works when the trust design matches intent. The lesson learned is that the decedent’s trust was revocable and maintained control during lifetime. The decedent’s estate planning goals were undermined.

For Informational Purposes only and not for legal or tax advice.

About the Author – Marie Feindt, JD 

Marie Feindt is the Planning Specialist – Estate Attorney at Members’ Wealth, a boutique wealth management firm that offers a comprehensive and holistic approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of estate planning experience, Marie and the Members’ Wealth team thrive on bringing clarity and confidence to clients’ unique situations. She believes everyone, young adults and older, need the essential documents to conserve and preserve and transfer assets accumulated during lifetime to the next generation.

Marie received her JD from Widener University School of Law, her bachelor’s degree from Penn State University, University Park and is currently enrolled in the Villanova University Charles Widger School of Law Graduate Tax Program.

Marie is an Adjunct Faculty at the Villanova University College of Professional Studies Paralegal Professional Certificate Program where she teaches Estates & Trusts and Civil Procedure & Litigation and Torts & Personal Injury Law.

Marie volunteers for a monthly legal clinic at The Salvation Army in Chester, PA facilitated by the Christian Legal Clinic of Philadelphia. She has served on the Women’s Commission of Delaware County and as a Board Member for the Delaware County Literacy Council.

Marie enjoys biking, reading, yoga and walking in her free time with her husband and three children.

To get in touch with the Members’ Wealth team today, I invite you to email info@memberswealthllc.com or call (267) 367-5453. 

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