What NOT To Do When A Trust Is The IRA Beneficiary | Kansas & Oklahoma Estate Planning

In a Private Letter Ruling (PLR ) on June 20, 2014, the IRS ruled that a surviving spouse who received proceeds from her deceased husband’s IRA through a trust could not roll over the IRA funds because more than 60 days had passed since their receipt. The PLR tells us what not to do when a trust is the beneficiary of an IRA.

“Ben’s” IRA named a trust as beneficiary of his IRA. The trustees were his two children. Ben’s wife “Ann” was to receive 25% of the IRA. After Ben died, the proceeds of the IRA were paid to the trust and deposited into the trust’s checking account.

Ann opened an IRA in her name and her 25% was deposited directly (rolled over) into Ann’s IRA, but more than 60 days after the IRA was distributed to the trust. Ann then received a K-1 showing this to be a taxable distribution.

Ann applied to the IRS for a waiver of the 60-day rollover period and the IRS denied her request, meaning the money she received from the trust could not be treated as a tax-free rollover. It also probably created an excess IRA contribution. If it exceeded the IRA contribution limit, the excess amount would automatically be subject to a 6% penalty each year until corrected.

The 6% excess contribution penalty is reported on IRS Form 5329. If the Form 5329 is not filed, the statute of limitations (normally 3 years) never begins to run, adding more penalties and interest to an already costly situation.

Now, in an upcoming post, I’ll discuss what was done wrong and how the problem could have been avoided but in the meantime, if you have questions about your IRA, please schedule a complimentary review (remember, always free for our valued clients!) with our office.

Jerry Shiles
Attorney
Parman & Easterday