Designated Beneficiaries of IRAs and See-Through Trusts

In a recent private letter ruling, the IRS provided someguidance on what constitutes a designated beneficiary and what determines theapplicable distribution period of an IRA.

Under IRC § 401(a)(9)(E), a “designated beneficiary” is any individualdesignated as a beneficiary by the employee, or IRA holder.  Trusts can not be designated beneficiaries,only individuals.  However, a beneficiaryof a trust can be a designated beneficiary under an IRA if the trust is a“see-through trust.” 

Under Treas. Regs.§ 1.401(a)(9)-4, the four requirements of a see-though trust are that: “(1) thetrust is valid under state law or would be, but for the fact there’s no corpus; (2) the trust is irrevocableor will, by its terms, become irrevocable on the death of the employee; (3) thebeneficiaries of the trust who are beneficiaries with respect to the trust’sinterest in the employee’s benefit plan are identifiable from the trustinstrument; and (4) relevant documentation has been timely provided to the planadministrator.”

Ifthese four requirements are met, the designated beneficiary of the IRA will be the trust beneficiary withthe shortest life expectancy.  This lifeexpectancy should be used to determine the applicable distribution period.

See Dawn S.Markowitz, See-Through Trusts and IRAs,Wealth Management, May 21, 2013.