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CCH® PENSION — 09/27/11

Sub-IRAs created by trustee-to-trustee transfer were inherited IRAs

Two sub-individual retirement accounts (IRAs) created by a trustee-to-trustee transfer for two non-spousal beneficiaries who acquired their sub-IRAs because of their parent's death are inherited IRAs within the meaning of Code Sec. 408(d)(3)(C), according to an IRS letter ruling.

The owner of an IRA died testate, leaving her two children entitled to equal one-half shares of the IRA under her will. The personal representative, one of the decedent's children, proposed dividing the IRA into two equal one-half shares. This would be accomplished by trustee-to-trustee transfers into two separate sub-IRAs that would be inherited IRAs and maintained in the decedent's name with the children as beneficiaries.

The IRS ruled that, to the extent that each sub-IRA would be considered an IRA, it would constitute an "inherited" IRA under Code Sec. 408(d)(3)(C). The proposed trustee-to-trustee transfer that would be used to establish a sub-IRA would not constitute a taxable payment or distribution under Code Sec. 408(d) or an attempted rollover because the transfer would be directed by the beneficiary after the death of the IRA owner and the sub-IRA would be set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary. Separate IRAs for the two beneficiaries could be maintained that would be treated separately for purposes of determining minimum distribution requirements under Code Sec. 401(a)(9), according to the IRS.

Finally, the distribution period for the children would be computed by reference to the decedent's remaining life expectancy using the age of the decedent as of her birthday in the calendar year of her death because the IRA owner died after her beginning date for her required minimum distributions under Code Sec. 401(a)(9) and because there was no designated beneficiary of her IRA. For purposes of Code Sec. 401(a)(9), only individuals may be designated beneficiaries. The IRS explained that because she did not designate an individual as beneficiary but instead designated her estate as beneficiary, there was no designated beneficiary of the IRA.

Source: IRS Letter Ruling 201128036.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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