See-through trust may divide IRA into five inherited beneficiary IRAs

Plain-English summary

A decedent who had already reached the required beginning age named a revocable trust as the beneficiary of an IRA, and the trust became irrevocable at death. After other obligations were satisfied from non-IRA assets, the trust residue belonged outright to five adult children. The trustee divided the IRA through direct transfers and proposed transferring one account to an inherited IRA for each child, all titled in the decedent's name for the applicable beneficiary. The IRS ruled that the trust was a qualifying see-through trust, the five new accounts would be inherited IRAs, and the division and trustee-to-trustee transfers would not be taxable distributions, attempted rollovers, or disqualifying events. Each child could take required minimum distributions from the respective account, but all five accounts had to use the life expectancy of the oldest individual who remained a trust beneficiary on September 30, 2014.

Ruling snapshot

• Question: Could the see-through trust divide the decedent's IRA into five inherited IRAs through trustee-to-trustee transfers, and how would required minimum distributions be calculated?
• Outcome: Approved for all six requested rulings
• Key authorities: IRC §§ 401(a)(9) and 408; Treas. Reg. §§ 1.401(a)(9)-4, 1.401(a)(9)-5, 1.401(a)(9)-8, and 1.408-8; Rev. Rul. 78-406

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

201503024

OCT 20 2014

U.I.L. 401.06-01 -- 408.03-00

T:EP:RA:T3

XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX

Legend:
Decedent A = XXXXXXXXXXXXXX
Individual B = XXXXXXXXXXXXXX
Individual C = XXXXXXXXXXXXXX
Individual D = XXXXXXXXXXXXXX
Individual E = XXXXXXXXXXXXXX
Individual F = XXXXXXXXXXXXXX
Custodian G = XXXXXXXXXXXXXX
Custodian H = XXXXXXXXXXXXXX
State I = XXXXXXXXXXXXXX
Trust T = XXXXXXXXXXXXXX
IRA X = XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
IRA B-1 = XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
IRA B-2 = XXXXXXXXXXXXXXX
IRA B-3 = XXXXXXXXXXXXXXX
IRA B-4 = XXXXXXXXXXXXXXXX
IRA B-5 = XXXXXXXXXXXXXXXX
IRA B-6 = XXXXXXXXXXXXXXXXX
IRA B-7 = XXXXXXXXXXXXXXXXX
Date 1 = XXXXXXXXXXXXXXXXXX
Date 2 = XXXXXXXXXXXXXXXXXX
Date 3 = XXXXXXXXXXXXXXXXXX
Date 4 = XXXXXXXXXXXXXXXXXX

Dear XXXXXXXXXX:

This is in response to your letter dated May 7, 2014, as supplemented by
correspondence dated September 10, 2014, submitted on your behalf by your
authorized representative, in which you request several rulings under section
401(a)(9) and 408 of the Internal Revenue Code (“Code”).

You represent that you are the current trustee of Trust T, which Decedent A
designated as the beneficiary of Decedent A’s IRA X. You have divided IRA X
into five separate IRAs, each labeled in the name of Trust T as beneficiary of
Decedent A’s IRA. You propose to distribute these five separate IRAs from the
trust to new IRAs (the “Beneficiary IRAs”), each of which will be titled in
Decedent A’s name for the benefit of one of five beneficiaries of Trust T.

The following facts and representations have been submitted under penalty
of perjury in support of the ruling requested.

Decedent A was a resident of State I. Decedent A died in 2013, several
years after having reached age 70-½. Prior to his death, Decedent A
established Trust T, a revocable trust which was amended from time to time prior

to his death.

Decedent A owned IRA X, which was maintained by Custodian G.
Decedent A designated Trust T as the primary beneficiary of IRA X.

You represent that Trust T is valid under the laws of State I and became
irrevocable upon Decedent A’s death. You further represent that copies of the
trust agreement for Trust T were provided to Custodian G and Custodian H prior

to May 7, 2014, the date of your submission.

Trust T provides for the payment of debts and expenses and certain
distributions to Decedent A’s spouse and to Individual B, all of which have been
satisfied from assets other than the assets of Decedent A’s IRA. The remainder
of the assets of Trust T (the “Trust T Residue”) is directed to be divided into as
many equal shares as shall be necessary to create one share for each of
Decedent A’s children who survive Decedent A, and one share for each of
Decedent A’s deceased children who is survived by one or more descendants

who survive Decedent A.

The terms of Trust T further direct that each such share be distributed
outright to any such person who has attained thirty years of age at the time of
such distribution.

You have represented that Decedent A was survived by Individuals B, C, D,
E and F, who are all living children of Decedent A, and that Decedent A had no

children who predeceased him. You represent that each of Individuals B, C, D, E
and F has attained age thirty (30).

After Decedent A’s death, you, as successor trustee of Trust T, established
IRA B-1 with Custodian G, in the name of Trust T as beneficiary of Decedent A's
IRA. On or about Date 1, you transferred the assets of IRA X to IRA B-1.

You subsequently established IRAs B-2, B-3, B-4, and B-5 with Custodian
G, each in the name of Trust T as beneficiary of Decedent A’s IRA. Each such
new IRA also indicated that it was for the benefit of one of Individuals C, D, E or
F. On or about Date 2, you transferred one-fifth of the assets of IRA B-1 to each
of IRAs B-2, B-3, B-4, and B-5. The remaining one fifth of the assets of IRA B-1
remained in IRA B-1, whose title was amended to add an indication that it is
maintained for the benefit of Individual B.

On Date 3, the assets of IRA B-3 were transferred to a new IRA, IRA B-6,
with Custodian H. Like IRA B-3, IRA B-6 was titled in the name of Trust T as
beneficiary of Decedent’s IRA, and also indicating that it is for the benefit of
Individual D.

On Date 4, the assets of IRA B-4 were transferred to a new IRA, IRA B-7,
with Custodian H. Like IRA B-4, IRA B-7 was titled in the name of Trust T as
beneficiary of Decedent's IRA, and also indicating that it is for the benefit of
Individual C.

You represent that all of the transfers described above were made through
trustee-to-trustee transfers.

IRAs B-1, B-2, B-5, B-6, and B-7 are a part of the Trust T Residue. You
propose to distribute IRAs B-1, B-2, B-5, B-6, and B-7 to the five beneficiaries of
the Trust T Residue (one IRA to each beneficiary), outright and free of Trust T,
by means of trustee-to-trustee transfers. Each such IRA would be transferred to
a new IRA, titled in the name of Decedent A for the benefit of the applicable
individual beneficiary of Trust T. You intend that each such distributed IRA be
considered an “inherited IRA” within the meaning of section 408(d)(3)(C) of the
Code, and that the required minimum distributions from each of such Beneficiary
IRAs be determined based on the life expectancy of the oldest of Individuals B,
C, D, E or F who remains a beneficiary on September 30 of the year following the
Decedent's death.

Based on the above, you request the following rulings:

1. That Trust T constitutes a “see-through” trust within the meaning of

section 1.401(a)(9)-4, Q&A-5, of the Income Tax Regulations (the “Regulations”).

2. That the five Beneficiary IRAs will be inherited IRAs within the meaning
   of section 408(d)(3)(C) of the Code.

3. That sections 401(a)(9) and 408 of the Code do not preclude the .
   division of Decedent A’s IRA and the establishment of the five
   Beneficiary IRAs, each in the name of Decedent A for the benefit of one

of the five beneficiaries of Trust T.

4. That the trustee-to-trustee transfers (i) from IRA X to IRA B-1; (ii) from
   IRA B-1 to IRA B-2, IRA B-3, IRA B-4 and IRA B-5; (iii) from IRA B-3 to
   IRA B-6; (iv) from IRA B-4 to IRA B-7; and (v) from IRA B-1, IRA B-2,
   IRA B-5, IRA B-6 and IRA B-7 to the five Beneficiary IRAs, will not
   constitute taxable distributions or payments, nor will they be considered
   attempted rollovers.

5. That the trustee-to-trustee transfers to the five Beneficiary IRAs will not
   cause the Beneficiary IRAs to lose their qualified status under section
   408(a) of the Code.

6. That each of Individuals B, C, D, E and F may receive the required
   minimum distribution under section 401(a)(9) of the Code from his or
   her respective Beneficiary IRA using the life expectancy of the oldest of
   Individuals B, C, D, E and F who remains a beneficiary on September

30, 2014.

Section 408(a) of the Code provides the rules governing IRAs. Section
408(a)(6) of the Code provides that, under regulations prescribed by the
Secretary, rules similar to the rules of section 401(a)(9) and the incidental death
benefit requirements of section 401(a) shall apply to the distribution of the entire
interest of an individual for whose benefit the trust is maintained.

Section 1.408-8, Q&A 1(b), provides that for purposes of applying the
required minimum distribution rules in sections 1.401(a)(9)-1 through 1.401(a)(9)-
9 and 1.401(a)(9)-6 for qualified plans, the IRA trustee, custodian, or issuer is
treated as the plan administrator, and the IRA owner is substituted for the

employee.

Under section 401(a)(9)(A) of the Code, a trust will not be considered
qualified unless the plan provides that the entire interest of each employee (i) will
be distributed to such employee not later than the required beginning date, or (ii)
will be distributed, beginning no later than the required beginning date, over the
life of such employee or over the lives of such employee and a designated
beneficiary or over a period not extending beyond the life expectancy of such
employee or the life expectancy of such employee and a designated beneficiary.

• Section 401(a)(9)(B)(i) of the Code provides, in general, that if an employee
  dies after distribution of his interest has begun in accordance with section

401(a)(9)(A)(ii) (after his required beginning date), the remaining portion of his
interest must be distributed at least as rapidly as under the method of distribution
being used as of the date of his death.

Section 401(a)(9)(C) of the Code provides, in relevant part, that for
purposes of section 401(a)(9), the term “required beginning date” means April 1
of the calendar year following the calendar year in which the employee attains

age 70-1/2.

Section 401(a)(9)(E) of the Code provides that for purposes of section 401,
the term “designated beneficiary” means any individual designated as a
beneficiary by the employee.

Section 1.408-8 of the Regulations, Q&A-1(a), provides, in part, that IRAs
are subject to the required minimum distribution rules under section 401(a)(9) of
the Code and that in order to satisfy section 401(a)(9) of the Code for purposes
of determining required minimum distributions for calendar years beginning on or
after January 1, 2003, the rules of section 1.401(a)(9)-1 through 1.401(a)(9)-9 of
the Regulations must be applied, except as otherwise provided.

Section 1.401(a)(9)-4 of the Regulations, Q&A-1, provides, in relevant part,
that a designated beneficiary is an individual who is designated as a beneficiary
under the plan. An individual may be designated as a beneficiary under the plan
either by the terms of the plan or, if the plan so provides, by an affirmative
election by the employee (or the employee’s surviving spouse) specifying the
beneficiary. Under the Regulations, a designated beneficiary need not be
specified by name in the plan in order to be a designated beneficiary so long as
the individual who is to be the beneficiary is identifiable under the plan. The
member of a class of beneficiaries capable of contraction or expansion will be
treated as being identifiable if it is possible to identify the class member with the
shortest life expectancy. Further, the passing of an employee’s interest to an
individual under a will or otherwise under applicable state law will not make that
individual a designated beneficiary under section 401(a)(9)(E) unless that
individual is designated as a beneficiary under the plan.

Section 1.401(a)(9)-4 of the Regulations, Q&A-3, provides that only
individuals may be designated beneficiaries for purposes of section 401(a)(9). A
person who is not an individual, such as the employee’s estate or a charitable
organization, may not be a designated beneficiary.

Section 1.401(a)(9)-4 of the Regulations, Q&A-4, provides in relevant part,
that in order to be a designated beneficiary, an individual must be a beneficiary
as of the date of the employee’s death. Generally, an employee’s designated
beneficiary will be determined based on the beneficiaries designated as of the
date of death who remain beneficiaries as of September 30 of the calendar year
following the calendar year of the date of death.

Section 1.401(a)(9)-4 of the Regulations, Q&A-5, provides that where a
trust is named as a beneficiary of an employee, the trust is not a designated
beneficiary; however, beneficiaries of the trust with respect to the trust's interest
in the employee’s benefit may be treated as designated beneficiaries if the
following requirements are met: (1) the trust is valid under state law, or would be
but for the fact 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 section 1.401(a)(9)-4 of the
Regulations, Q&A-1, from the trust instrument; and (4) relevant documentation
has been timely provided to the plan administrator.

Section 1.401(a)(9)-4, Q&A-6(b) of the Regulations provides, in relevant
summary, that to meet the requirements set forth in Q&A 5, at a minimum,
documentation sufficient to enable an IRA custodian to identify beneficiaries of
an IRA must be provided by a trustee to the custodian by October 31 of the
calendar year immediately following the calendar year in which the IRA owner

died.

With respect to your first ruling request, you have represented that Trust T
is valid under the laws of State I and was valid under the laws of State I as of the
date of Decedent A’s death, that Trust T became irrevocable upon Decedent A’s
death, and that a copy of the trust agreement for Trust T was provided to
Custodian G , the custodian of IRA X, IRA B-1, IRA B-2, IRA B-3, IRA B-4, and
IRA B-5 and to Custodian H, the custodian of IRA B-6 and IRA B-7, prior to
October 31, 2014. The identity of each person entitled to receive any portion of
Decedent A’s IRA upon Decedent A’s death is determinable under the provisions
of the trust agreement for Trust T.

Therefore, with respect to your first ruling request, we conclude that Trust T
constitutes a “see-through” trust described in section 1.401(a)(9)-4, Q&A-5, of the
Regulations with respect to IRA X, IRA B-1, IRA B-2, IRA B-3, IRA B-4, IRA B-5,

IRA B-6 and IRA B-7.

With respect to your next five ruling requests (numbered 2 through 6),
section 408(d)(1) of the Code provides generally that, in accordance with the
rules of Code section 72, amounts paid or distributed from an IRA are included in

gross income by the payee or distributee.

Section 408(d)(3)(A) of the Code provides that section 408(d)(1) does not
apply to any amount paid or distributed out of an IRA to the individual for whose
benefit the IRA is maintained if: (i) the entire amount received (including money
and any other property) is paid into an IRA for the benefit of such individual not
later than the 60th day after the day on which the individual receives the payment
or distribution, or (ii) the entire amount received (including money and any other
property) is paid into an eligible retirement plan (other than an IRA) for the benefit

of such individual not later than the 60th day after the date on which the payment
or distribution is received, except that the maximum amount which may be paid
into such plan generally may not exceed the portion of the amount received
which is includible in gross income (determined without regard to section
408(d)(3) of the Code).

Section 408(d)(3)(C) of the Code provides, generally, that amounts from an
“inherited” IRA cannot be rolled over into another IRA.

Section 408(d)(3)(C) of the Code provides that an IRA is an inherited IRA if
the individual for whose benefit the IRA is maintained acquired the IRA by reason
of the death of another individual, unless the acquiring individual is the surviving
spouse of such individual.

Section 1.401(a)(9)-4 of the Regulations, Q&A-5(c), provides in relevant
part that the separate account rules under section 1.401(a)(9)-8, Q&A-2 are not
available to beneficiaries of a trust with respect to the trust’s interest in the

employee’s benefit.

Revenue Ruling 78-406, 1978-2 C.B. 157 (“Rev. Rul. 78-406”), provides
that the direct transfer of funds from one IRA trustee to another IRA trustee, even
if at the behest of the IRA holder, does not constitute a payment or distribution to
a participant, payee or distributee, as those terms are used in section 408(d) of
the Code. Furthermore, such a transfer does not constitute a rollover
distribution. Rev. Rul. 78-406 is applicable if the trustee-to-trustee transfer is
directed by the beneficiary of an IRA after the death of the IRA owner as long as
the transferee IRA is set up and maintained in the name of the deceased IRA

owner for the benefit of the beneficiary.

With respect to your second ruling request, each of the five Beneficiary
IRAs, which will be titled in Decedent A’s name for the benefit of one of
Individuals B, C, D, E and F, will have been acquired by such individuals by
reason of Decedent A’s death. None of Individuals B, C, D, E and F is Decedent

A’s surviving spouse.

Therefore, with respect to your second ruling request, we conclude that the
five Beneficiary IRAs, to be created by means of trustee-to-trustee transfers from
IRA B-1, IRA B-2, IRA B-5, IRA B-6 and IRA B-7, will be inherited IRAs within the

meaning of section 408(d)(3)(C) of the Code.

With respect to your third ruling request, as a result of the transactions
described herein, Decedent A’s IRA will be divided into five separate IRA’s, each
for the benefit of a different beneficiary. Although the Regulations under section
401(a)(9) of the Code preclude separate account treatment where amounts pass
through a trust, neither the Code nor the Regulations preclude the posthumous
division of a decedent's IRA into more than one IRA. Therefore, with respect to

your third ruling request, we conclude that sections 401(a)(9) and 408 of the
Code do not preclude the division of Decedent A’s IRA and the establishment of
the five Beneficiary IRAs, each in the name of Decedent A for the benefit of a

one of Individuals B, C, D, E and F.

With respect to your fourth and fifth ruling requests, section 408(d)(1) of the
Code provides that, in general, amounts distributed or paid out of an IRA are
taxable to the payee or distributee. Section 408(d)(3)(C) of the Code provides
that amounts from “inherited” IRAs may not be rolled over to another IRA.

However, as noted above, a trustee-to-trustee transfer described in Rev.
Rul. 78-406 does not constitute a payment or distribution. Such a transfer may be
accomplished after the death of the IRA holder on behalf of the beneficiaries of a

decedent's IRA.

Therefore, with respect to your fourth and fifth ruling requests, we conclude
that:

• The trustee to-trustee transfers from IRA X to IRA B-1, from IRA B-1 to
  IRA B-2, IRA B-3, IRA B-4 and IRA B-5, from IRA B-3 to IRA B-6, from
  IRA B-4 to IRA B-7, and the trustee-to trustee transfers from IRA B-1,
  IRA B-2, IRA B-5, IRA B-6 and IRA B-7 to the five Beneficiary IRAs, will
  not constitute taxable distributions or payments, nor will they be
  considered attempted rollovers.

• The trustee-to-trustee transfers to IRA B-1, IRA B-2, IRA B-3, IRA B-4,
  IRA B-5, IRA B-6 and IRA B-7, and to each of the five Beneficiary IRAs,
  will not cause such IRAs to lose their qualified status under Section

408(a) of the Code.

With respect to your sixth ruling request, section 1.401(a)(9)-4 of the
Regulations, Q&A-4, provides in relevant part that, in general, in order to be a
designated beneficiary, an individual must be a beneficiary as of the date of
death. The employee’s designated beneficiary will be determined based on the
beneficiaries designated as of the date of death who remain beneficiaries as of
September 30 of the calendar year following the calendar year of employee’s

death.

Section 1.401(a)(9)-4 of the Regulations, Q&A-5(c), provides that if the trust
has more than one beneficiary, the rules under section 1.401(a)(9)-5, Q&A-7,
determine which beneficiary's life expectancy shall be used to determine the

distribution period.

Section 1.401(a)(9)-5 of the Regulations, Q&A-5(a), provides, in relevant
part, that if an employee dies after distribution of his interest has begun on or
after the employee’s required beginning date, in order to satisfy section

401(a)(9)(B)(i) of the Code, the applicable distribution period for distribution
calendar years after the distribution calendar year containing the employee’s
date of death is either (1) if the employee has a designated beneficiary as of the
date determined under A-4 of section 1.401(a)(9)-4, the longer of (i) the
remaining life expectancy of the employee’s designated beneficiary; and (ii) the
remaining life expectancy of the employee; or (2) if the employee does not have
a designated beneficiary as of the date determined under A-4 of section
1.401(a)(9)-4, the remaining life expectancy of the employee.

Section 1.401(a)(9)-5 of the Regulations, Q&A-7(a), states that if more than
one individual is a designated beneficiary, the beneficiary with the shortest life
expectancy will be the designated beneficiary for purposes of determining the
applicable distribution period.

Section 1.401(a)(9)-9 of the Regulations, Q&A-1, sets forth the “Single Life
Table,” to be used to determine the life expectancy of an individual.

As we concluded with respect to your first ruling request, Trust T qualifies
as a “see-through trust” described in section 1.401(a)(9)-4, Q&A 5 of the
Regulations. You represent that Individuals B, C, D, E, and F are the
beneficiaries of Trust T’s interest in Decedent A’s IRA. Therefore, these
beneficiaries may be treated as designated beneficiaries of Decedent A’s IRA.

Therefore, with respect to your sixth ruling request, we conclude that
Individuals B, C, D, E and F may each receive the required minimum distribution
under section 401(a)(9) of the Code from his or her respective Beneficiary IRA
using the life expectancy of the oldest of such individuals who remains a
beneficiary of Trust T on September 30, 2014.

The rulings in this letter are based on the assumption that IRA X, IRA B-1,
IRA B-2, IRA B-3, IRA B-4, IRA B-5, IRA B-6, IRA B-7, and the Beneficiary IRAs
to be established, will meet the requirements of section 408(a) of the Code at all
relevant times. Furthermore, this letter ruling rests on the assumption that Trust
T is valid under the laws of State I as represented, and that the steps taken and
proposed to be taken by you as Trustee of Trust T are pursuant to and
permissible under Trust T and the laws of State I.

This ruling is directed only to the taxpayer who requested it. Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter ruling is being sent to your authorized representative
pursuant to a power of attorney on file in this office.

If you have any questions concerning this letter, please contact xxxxxxxx,

XXXXXXXXXXXXX, at XXXXXXXXXXXXXX. All correspondence should be addressed to
SE:T:EP:RA:T3.

Sincerely yours,

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

Enclosures:
Deleted copy of letter ruling
Notice 437

cc: XXXXXXXXXXXXX