Consider the following the scenario:

Decedent establishes a trust under his will. Under the terms of the trust, Decedent’s daughter is entitled to all net income. In addition, the trustee, a financial institution, is authorized to distribute trust principal to Daughter and Daughter’s descendants for health, education, support, and maintenance. Upon Daughter reaching the age of 50, the trust will terminate and be paid to Daughter outright. However, if Daughter dies prior to age 50, the trust addresses a variety of contingencies:

  • Daughter’s children are next in line as beneficiaries;
  • If any of Daughter’s children are under the age of 21, his or her share will be held in further trust;
  • If a child of Daughter dies after Daughter but prior to 21, his or her share will be paid to the child’s estate;
  • If Daughter dies without living descendants, the trust will pass to the Decedent’s two siblings; and
  • If none of the above survive, the trust will be payable to various charities.

The Decedent named the trust as beneficiary of his IRA. Is this trust a qualified trust and, if so, who is the oldest beneficiary for purposes of determining minimum required distributions (MRDs)?

As discussed in the previous post, when retirement assets are payable to a trust, the trust must be a “qualified trust” in order to preserve stretch out. A trust will not be a qualified trust unless it has identifiable beneficiaries, all of whom are individuals. Because every trust has multiple layers of beneficiaries and potential beneficiaries, the critical question is: how far down the line of beneficial succession do you have to go?

In the scenario above, the potential beneficiaries are Daughter, Daughter’s children, trusts for Daughter’s children, Decedent’s children’s estates, Decedent’s siblings, and charity. If for purposes of stretch out you are required to take all of these into account, the trust would fail as a qualified trust. The inclusion of charities, and possibly the trusts for Daughter’s children and children’s estates, would be the deal breakers.

Fortunately, in a recent private letter ruling, the IRS delivered a more taxpayer-friendly decision. For reasons it does not adequately explain, the IRS concludes that the only beneficiaries that must be considered are Daughter and Daughter’s children. The trusts for Daughter’s children, Daughter’s children’s estates, Decedent’s siblings, and the charities can all be disregarded as mere successor beneficiaries. Thus, the trust is qualified, and Daughter is the measuring life for purposes of calculating MRDs.

This ruling seems to stand for the proposition that we need only look at the current beneficiaries and the first line remainder beneficiaries–what the Tennessee Trust Code refers to as the “qualified beneficiaries” of a trust–to determine whether a trust is qualified for stretch out purposes. This would make sense as a bright-line rule. Unfortunately, as with all private letter rulings, this ruling is not binding on anyone other than the taxpayer who requested it and cannot be cited as precedent. Moreover, the IRS’s analysis amounts to little more than a recital of various regulations and a conclusory statement. Thus, the safer approach (and the only approach likely to satisfy a corporate trustee in the absence of your own private letter ruling) remains a conduit trust.

Source: Private Letter Ruling 201633025 (pdf)

Posted by Joel D. Roettger, JD, LLM, EPLS