One of the most valuable estate planning tools for both protecting and maximizing the value of IRA assets is the use of a trust as an IRA beneficiary. Properly structured, an IRA beneficiary trust can allow extended tax deferral benefits by “stretching out” the payments over the beneficiary’s life expectancy.
The IRS “separate share rule” requires that, for purposes of calculating distributable net income (DNI), any trust that has more than one beneficiary and “substantially separate and independent shares of different beneficiaries in the trust shall be treated as separate trusts.”
In the context of an IRA beneficiary trust, the separate share rule also allows an IRA to factor in the ages of each beneficiary of the IRA in making required minimum distributions (RMDs), thus achieving “stretch” treatment.
However, failure to properly structure the IRA trust can lead to unfavorable consequences. The trust document must properly identify the separate shares per beneficiary, or the trust is required to make the RMDs based on the age of the life expectancy of the oldest beneficiary, and will therefore lose the advantage of prolonged tax deferral from stretching out payments as originally planned.
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