October 14, 2013
Authored by: Kathy Sherby and Stephanie Moll
Once again, the Internal Revenue Service reminds us in PLR 201330011 that a distribution from an IRA to a residuary beneficiary will not result in recognition of IRD (also known as income in respect of a decedent) to the estate or trust, as only the residuary beneficiary will recognize the IRD.
Here the Decedent’s Estate was the beneficiary of the Decedent’s IRA. Under the provisions of the Decedent’s Will, his Estate poured over to his Revocable Trust on his death. His Revocable Trust provided that each of two Charities were to receive a percentage of the residue of his Trust, and further provided that the Trustee could satisfy this percentage gift in cash or in kind and also could allocate different assets to different residuary beneficiaries in satisfaction of their percentage interest in the trust residue.
Of course, the IRA constitutes income in respect of a decedent (IRD), and pursuant to IRC § 691 (a)(2) and Reg. § 1.691(a)-4(b)(2), the transfer of an item of IRD by an estate, such as by satisfying an obligation of the estate, will cause the estate to recognize the IRD, but if the estate transmits the item of IRD to a specific legatee of the item of IRD or to a residuary beneficiary (emphasis added), only the legatee or the residuary beneficiary will recognize the IRD.
When an IRA is assigned by an estate to a charity to satisfy a pecuniary bequest to that charity, the Service has taken the position in CCA 200644020 (issued November 3, 2006) that the estate must recognize the IRD, and that the estate is not entitled to a DNI (“distributable net income”) distribution deduction for that charitable distribution so that the IRD does not flow out to the charity. But when an estate is payable to 4 charities and the estate assigns the IRA to the charities, the assignment of the IRA to the four remainder beneficiaries does not cause the estate to recognize the IRD (PLR 200826028).
Here the result was the same as in PLR 200826028, even though the IRA was payable in the first instance to the estate and the estate was payable to the trust and the trust was then distributable only in part to charities. The fact that the executor and trustee joined together to allocate the IRAs to the charities and the non-IRD assets to the non-charitable beneficiaries did not cause the estate or the trust to have to recognize IRD, because the disproportionate distribution was authorized under the trust instrument and the distribution was to residuary beneficiaries.
Here the executor and trustee wanted to get the IRAs to the charities, because the distribution period for required minimum distribution purposes would have been limited to 5 years if the Decedent was under age 70 ½ or to the Decedent’s remaining life expectancy if the Decedent was over age 70 ½. In either event, any non-charitable beneficiary would not have been able to use his or her own life expectancy because the Decedent’s estate was the beneficiary of the IRA. Even if the trust was the beneficiary, having charities as countable beneficiaries would have eliminated the trust as a look-through trust, with the resulting short distribution period.