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The following was written by Attorney Jack E. Stephens, for the professional manual, Rules of Trust Administration in California, regarding the administration of a Living Trust on the death of a Trustor. This is Part 5 of an ongoing series.

§13100 Declaration

Some of the assets we acquire for our clients during the Trust Administration is via the §13100 Declaration. This statutory law allows heirs to the property or a Trustee to obtain the property without a Court order issued pursuant to Letters Testamentary. Often the Successor Trustee will provide a form letter received from some financial institution which states that Letters Testamentary are required for the release of the funds. In California a probate is not required if the gross value of the estate does not exceed $150,000.

The document allowed for in §13100 is an affidavit or a declaration signed under penalty of perjury providing the following:

1. The decedent's name and the date and place of decedent's death;

2. A statement that at least 40 days have elapsed since the death of the decedent with an attached copy of the decedent's death certificate;

3. That there is no proceeding presently being conducted regarding the decedent's estate;

4. A statement to the effect that the decedent's current gross estate does not exceed $150,000;

5. A description of the property in question;

6. The identification of the Successor Trustee or Affiant as the Successor of the decedent's interest in the property as the affiant or declarant;

7. A statement that no other person has a superior interest in the property;

8. A request that the property be paid, delivered or transferred to the Successor Trustee or Affiant;

9. Successor Trustee or Affiant affirms under penalty or perjury that all the information is true and correct.

It has been my experience that most all financial institutions will readily honor the §13100 Declaration. I find that it is helpful if you provide a cover letter summarizing the objectives of the Declaration so that the institution can better understand its significance. You can also include a copy of Probate Code §13100 and 13101 to support your authority to obtain the funds.

For declarations to request transfers of real property with a small gross value see Probate Code §13200.

Retirement Plan Issues

Inherited IRA

When I was writing my book, Avoiding the Tax Trap in Your IRA, I was amazed at the potential for additional taxes and penalties incurred by IRA owners because of the convoluted law. Although many of those laws and IRS regulations have been resolved by subsequent legislation, there are remaining issues that are not understood by clients as well as some professionals.

It is extremely important to advise your client on the proper action to take when dealing with Inherited IRAs. With an Inherited IRA, a beneficiary remains the beneficiary throughout the life of the IRA. The beneficiary never becomes the titled owner. As a result, he/she will have his/her name added as the beneficiary of the IRA with his/her social security number. The decedent's name will remain on title as the IRA owner. Should the beneficiary transfer this IRA to another IRA custodian (Trustee to Trustee transfer), the decedent's name must remain on title, and there will be no taxable distribution. Obviously, when adding the beneficiary's name and social security number to the IRA, he/she will be taxed on any subsequent distributions.

Spousal Options:

Surviving spouses have the most flexibility in receiving IRA distributions. Based on the decedent spouse's Minimum Required Distribution (MRD) schedule, a spouse may receive distributions as a beneficiary. If the decedent spouse has not reached age 70 ½, the surviving spouse may delay taking distribution until April 1st the year after the decedent spouse turns age 70 ½. The surviving spouse literally steps into the shoes of the decedent spouse. This alternative may be considered when the decedent spouse is significantly younger than the surviving spouse.

By far the most utilized option is the spousal rollover. In this situation, the surviving spouse becomes the owner of the IRA for all purposes. The surviving spouse may arrange a new IRA and designate his/her own beneficiaries or roll it into an existing IRA owned by the surviving spouse. If the spouse receives a rollover check of the funds, he/she will have only 60 days to arrange and fund a new IRA or place the funds in an existing IRA. It is recommended that the spouse request a trustee to trustee transfer arrangement of the funds so as to avoid the rollover restrictions.

Living Trust as IRA Beneficiary

A. Spousal Rollover

The IRS has issued numerous private letter rulings over the last 12 to 15 years which allowed the surviving spouse to rollover the IRA when a Trust was the designated beneficiary. Under these rulings, the surviving spouse as the designated Trustee of the Trust was in control of the decision-making in distributing the decedent's interest in the IRA. The surviving spouse was also listed as the primary Trust beneficiary in the Trust document. Basically, the rulings inferred that the IRA funds were distributed directly from the decedent's IRA to the surviving spouse and not considered as passing through a 3rd party Trust. As a result, the last sentence of the preamble to the final, IRC §401(a)(9) Treasury Regulations now states:

"A rollover may be accomplished even if assets pass through a trust."

It is important that the Trust in question include no restrictions on distributions to the surviving spouse. For example, if the Trust provisions include a condition that distributions to the surviving spouse are subject to an ascertainable standard, the spousal rollover will not be allowed.

It should be noted that because the only authority for a spousal rollover through a Trust have been private letter rulings, those rulings are only intended for the taxpayer requesting the ruling. As a result, many IRA Custodians will require a ruling from the IRS in favor of the surviving spouse. The ruling must be based on the application of the facts in question before making the benefits available should the Trust be designated. However, approximately 3 to 4 years ago, I wrote an extensive brief in this regard citing a history of private letter rulings allowing the rollover and the IRA Custodian agreed to the arrangement without a private letter ruling from my client.

B. Trust Beneficiaries as Designated Beneficiaries of the IRA

A Trust cannot be a Designated Beneficiary under the IRA Regulations. However, the Trust beneficiaries can be treated as Designated Beneficiaries of the IRA if the following requirement are met:

1. The Trust is a valid Trust 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 its owner;

3. The beneficiaries of the Trust who are beneficiaries with respect to the Trust's interest in the owner's benefit are identifiable from the Trust instrument and are individuals;

4. The IRA trustee, custodian, or issuer (Administrator) has been provided with either a copy of the Trust instrument with the Agreement that if the Trust is amended, the Administrator will be provided with a copy of the Amendment within a reasonable time, or in the alternative, all of the following:

a. A list of all of the beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the condition on their entitlement);

b. Certification that, to the best of the owner's knowledge, the list is correct and complete and that the requirements of (1), (2), and (3), listed above, have been met;

c. An agreement that, if the trust instrument is amended at any time in the future, the owner will, within a reasonable time, provide to the IRA trustee, custodian, or issuer a corrected certification to the extent that the amendment changes any information previously certified;

d. An agreement to provide a copy of the trust instrument to the IRA trustee, custodian, or issuer upon demand.

The deadline for providing the beneficiary documentation to the IRA trustee, custodian or issuer is October 31st of the year following the year of the owner's death. If these conditions are satisfied, the Trust is considered to be a "qualifying" Trust and distributions are made over the life expectancy of the beneficiary with the shortest life expectancy. Treas. Reg. §1.40(a)(9)-5, A-7(a). The regulations provide that beneficiaries of an IRA have a determination date of September 30th, the year after the IRA owner's death for distribution purposes. Therefore, it is important to remove charities by the determination date as such entities are considered to have no life expectancy. The prudent Trustee should determine the amount of the interest in which the charity is entitled and make a total distribution to such charity before such date. If that occurs, the charity is removed in determining the beneficiary with the shortest life expectancy.

When an IRA is payable to a Trust to benefit multiple non-spouse beneficiaries, another planning technique , known as the separate share rule, may be available. If there is provision in the Trust for in-kind distributions, separate IRA accounts can be made for each Trust beneficiary that shares an interest in the IRA benefits. This can be arranged even if the Trust continues in existence for other non-IRA assets.

IRA Designated Beneficiary Trust (DBT)

Because a Living Trust serves other objectives, it is my opinion that it is not a good candidate as the IRA beneficiary. The Living Trust usually provides that Trust funds shall be used to pay the Trustor's existing or final debts and taxes which benefits the Trustor's estate. As a result, the IRS has been successful in obtaining rulings that the estate is also a beneficiary of the Trust. If it is so determined, the estate, with zero life expectancy, can cause catastrophic tax ramifications and preclude any "stretch" IRA distributions to the individual Trust beneficiaries.

A better solution with clients having significant IRA funds is to designate an IRA Designated Beneficiary Trust (DBT) as the IRA beneficiary. If there is a surviving spouse, the DBT can be designated as the contingent beneficiary to the surviving spouse as the primary beneficiary. This Trust is specifically designed as a recipient of IRA funds to be distributed to the Trust beneficiaries with extended life expectancies. Additionally, the Trust provisions preclude any IRA funds to be utilized for the IRA owner's debts, taxes or any other expenses owed by the estate.

If the Trustee is given discretionary authority over distributions to the beneficiaries, this could provide asset protection features regarding creditor protection for such beneficiaries. If the Trust is designed with this objective it would be considered an "Accumulation," as opposed to a "Conduit" Trust. This determination is important regarding the issue of the shortest life expectancy rule for distributions. If the Trustee is required to immediately distribute all IRA funds received by the qualifying Trust, it is considered to be a "Conduit" Trust. As a result, only the life expectancies of the primary beneficiaries are taken into consideration regarding the shortest life expectancy issue. Reg. §1.401(a)(9)-5, A-7(c)(3), Ex. 2. However, if the Trust is created for asset protection in mind and the Trustee is given the authority to accumulate IRA funds, all potential beneficiaries, are taken into consideration. This would include the primary, contingent and any beneficiaries who could be designated through the exercise of powers of appointment by a beneficiary in the Trust. For example, if the powerholder could appoint to beneficiaries who are older than the primary beneficiary, the life expectancies of such beneficiaries would be considered in the shortest life expectancy determination. This could result in a drastic reduction in the period of distribution (For a more in-depth discussion on this subject see Life and Death Planning for Retirement Benefits by Natalie Choate).

Trust beneficiaries are not ordinarily allowed the benefit of the separate share rules in which separate Sub-Trusts are arranged for each beneficiary. For example, if children and grandchildren were designated, individually, as beneficiaries of an IRA, each beneficiary could arrange a separate account and take distribution over their individual life expectancy. This is known as the separate share rule and must be arranged by December 31st of the year following the year of the IRA owner's death. This, of course, benefits a younger beneficiary who is, then, not subject to the shorter life expectancy of an older beneficiary. As regards Trusts, the IRS issued obtained by Robert Keebler, CPA, which did allow for the separate share rule to be applied to Trusts on the condition that the individual Sub-Trusts of the DBT were named as the IRA beneficiaries. Based on this PLR, it is important that Sub-Trusts be designated as the beneficiaries with the IRA custodian rather than the Trust itself. Of course, the private letter ruling issued was valid for the requesting taxpayer and cannot be relied on by other taxpayers. However, it gives some insight as to how the IRS might rule on this issue.

Part 6 is soon to follow.





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