Taxation & Estate Planning

DESIGNATED BENEFICIARY COULD NOT BE CREATED THROUGH A POST-DEATH TRUST REFORMATION

By Charles Rubin

Individual retirement account (IRA) assets can be made payable to a trust at the death of the account owner. If the trust has a ?designated beneficiary? under the Code and Regulations, the payout from the IRA can typically be spread (and tax deferral maximized) over the lifetime of the designated beneficiary.

In a recent private letter ruling, a beneficiary trust of an IRA did not have a designated beneficiary. The trustee undertook a reformation action in state court to modify the trust so that after the reformation the trust then had a designated beneficiary.

In the ruling, the IRS rejected the attempt to create a designated beneficiary. The IRS indicated that a retroactive modification to the date of death of the account owner would not be respected for federal tax purposes. While the IRS will respect state court orders in many circumstances, it will respect it in regard to a reformation only if reformation is specifically authorized by the Code.  For example, Code §2055(e)(3) specifically allows parties to reform a charitable split interest trust to make the charitable interest eligible for the charitable deduction. Since there is no applicable Code provision authorizing a reformation so as to qualify a trust as having a designated beneficiary, the reformation would not be given effect.

Private Letter Ruling 201021038

Full post as published by Rubin on Tax on June 06, 2010 (boomark / email).