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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
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CCH® PENSION AND BENEFITS — 7/7/06

IRS permits transfer of beneficiary's interest in decedent's IRA into IRA owned by beneficiary's special needs trust

The IRS has privately ruled that the transfer of a disabled beneficiary's interest in a decedent's IRA to an IRA owned by the special needs trust of the beneficiary would not be considered a taxable transfer for purposes of Code Sec. 691(a)(2).

A disabled taxpayer was one of the named beneficiaries of his father's IRA. After the taxpayer's father died prior to his required beginning date, the guardian of the disabled taxpayer established a "special needs trust," intended to avoid income which would negatively affect the disabled taxpayer's eligibility for Medicaid. The taxpayer was the grantor and the sole beneficiary of the trust and the guardian was the trustee. Under the terms of the trust, the guardian had the sole discretion to spend or accumulate for the benefit of the taxpayer, as much of the trust net income and principal as would be necessary to support the disabled taxpayer.

The guardian proposed to transfer the taxpayer's interest in his deceased father's IRA into an IRA which named the taxpayer's special needs trust as beneficiary, without the transfer being considered taxable to either the decedent's estate or the disabled taxpayer. The IRS ruled that since the taxpayer continued to own the IRA after the transfer, the transfer was not a sale or exchange of the taxpayer's IRA interest.

Further, in calculating the annual distributions required under Code Sec. 401(a)(9) to be made to the disabled taxpayer's special needs trust from the IRA owned by the trust, the IRS ruled that the required distributions could be calculated based upon the life expectancy of the disabled taxpayer.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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