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Firm Seeks Relief for 2 IRA Post-Death Compliance Issues

AUG. 12, 2020

Firm Seeks Relief for 2 IRA Post-Death Compliance Issues

DATED AUG. 12, 2020
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Request for relief from Treasury regarding two systemic issues under IRC Section 401(a)(9)

August 12, 2020

Carol Weiser
Benefits Tax Counsel
Department of the Treasury, Carol.Weiser@treasury.gov

Stephen B. Tackney
Deputy Associate Chief Counsel
Office of Chief Counsel
Internal Revenue Service, stephen.b.tachney@irscounsel.treas.gov

Dear Ms. Weiser and Mr. Tackney:

I respectfully request that Treasury issue relief with respect to what I consider to be systemic issues regarding the existing regulations under reg. sec. 1.401(a)(9) and the reasons why such relief is needed.

The first issue involves reg. sec. 1.401(a)(9)-5, A-4(a). Under that regulation an unpaid required minimum distribution with respect to an IRA owner who died on or after his/her required beginning date without receiving his entire required minimum distribution for said year must be paid to a beneficiary by no later than December 31st of the year of death of an IRA owner. This regulation in my opinion should be amended to extend the date from December 31 of the year of death to the later of (1) December 31 of the year of death or (2) 12 months after the IRA owner's date of death.

The reason for the above suggestion follows:

(1) Many IRA owners may receive his/her required distributions monthly and pass away before receiving his/her entire required minimum distribution for the year of death.

(2) Many IRA owners may wait until the end of the year to receive his/her required minimum distribution and pass away before receiving the required minimum distribution for the year of death.

(3) The beneficiary of the deceased IRA owner's account may not be aware of the unpaid required minimum distribution issue until several months or more after the date of death of the IRA owner. This issue, in my opinion, happens frequently for such reasons as misplaced or lost IRA beneficiary forms, failure to timely determine all the IRA accounts owned by the decedent and the failure to be advised as to this issue by the professional adviser for an extended period of time.

In my opinion many beneficiaries cannot meet the year end deadline that is required under the existing IRS regulations. In that event the beneficiaries must prepare IRS Form 5329 in order to obtain a waiver of the 50% penalty provided for under IRC Section 4974. Most beneficiaries would then have to engage an accountant or attorney to prepare Form 5929 and incur an unnecessary expense.

Additional suggestions

(1) The IRS regulations should be amended to require financial institutions maintaining IRA accounts to alert the beneficiaries of deceased IRA owners in their IRA Custodial Agreements as to both the timing issue and the potential IRS penalty issue.

(2) In addition IRS Publication 590-B dated February 19, 2020 at page 8 briefly discusses this issue. In my opinion the treatment of this issue should be expanded and highlighted. It should alert the beneficiaries of the deceased IRA owner as to both the timing issue and the potential IRS penalty issue.

(3) Further the regulation should be amended to provide in essence that if an eligible designated beneficiary or a deemed eligible designated beneficiary of a deceased IRA owner passes away without taking his/her entire required minimum distribution for the year of death, then in that event then such unpaid required minimum distributions shall be paid to the successor beneficiary by the later of (1) the end of the year of death of the eligible designated beneficiary or deemed eligible designated beneficiary as the case may be or (2) 12 months after the date of death of the eligible designated beneficiary or the deemed eligible designated beneficiary as the case may be.

Explanatory note

Under the Secure Act if an IRA owner died prior to January 1, 2020, then on the subsequent death of his/her designated beneficiary the designated beneficiary is treated as an eligible designated beneficiary. For purposes of item (3) above I used the term “deemed eligible designated beneficiary” for emphasis purposes.

Summary

My recommendations (I think) are practical and benefit the public at large and should enhance the voluntary compliance of beneficiaries of inherited IRA accounts.

The next issue involves reg. sec. 1.401(a)(9)-4, Q&A-5 and 6(b).

This issue involves the IRS post-death trust compliance rules that are involved when an IRA owner selects a trust (herein after referred to as an IRA trust) as the beneficiary of his/her IRA account. It should be noted that IRA trusts are often established as the beneficiary of an IRA for estate planning and asset protection purposes. It also permits the IRA owner to select the trust remaindermen of the IRA trust.

My discussion will be limited to the IRS post-death documentation requirement found at reg.sec. 1.401(a)(9)-4, Q&A-6(b) that must be satisfied by October 31 of the calendar year immediately following the calendar year in which the [IRA owner] died. This assumes that all the other requirements under 1.401(a)(9)-4, Q&A-5 are satisfied.

It should be noted that reg. sec. 1.401(a)(9)-4, Q&A-6(b) requires the trustee to provide certain documentation to the [IRA institution] by the October 31 deadline. The IRS permits the trustee to satisfy the IRS post-death trust documentation requirement in one of two ways. These options are:

(1) The trustee can provide the IRA institution with a final list of beneficiaries of the trust and make a number of additional representations and agree to provide a copy of the trust instrument to the IRA institution upon demand; or

(2) The trustee can provide the IRA institution with a copy of the actual trust document for the trust that is named as the beneficiary of the deceased IRA owner's account.

In my opinion an innocent trustee may not satisfy the October 31 deadline for a number of reasons. These reasons include:

(1) The trustee was never advised by his/her professional adviser as to this requirement.

(2) The professional adviser to the trustee did not know about the requirement to begin with.

(3) The attorney handling the probate estate of the deceased IRA owner may be a general practitioner who is not well versed in the IRS post-death trust documentation requirement with respect to the decedent's IRA account that is payable to an IRA trust. Further, the attorney may not be engaged as trust counsel. In fact it is possible that no one is engaged to serve as trust counsel.

(4) The CPA who files the fiduciary income tax return for the IRA trust may not be aware of the IRS post-death trust documentation compliance requirement.

(5) IRA beneficiary may rely on a financial advisor who may not be familiar with the IRS post-death trust documentation compliance requirement.

(6) Many financial institutions permit an IRA owner to select a trust as the beneficiary of his/her IRA account. To my knowledge there is no requirement that the financial institution must provide any information to the IRA owner regarding the IRS requirements for a qualifying trust.

(7) The financial institution may possibly open up an IRA trust account as the beneficiary of the deceased IRA owner's account even if the financial institution does not receive the IRS post-death trust documentation.

(8) To the best of my knowledge there is no existing federal or state statute, rule, notice or regulation at this time that requires the financial institution maintaining an IRA account payable to an IRA trust to either accept or obtain any IRS post-death trust documentation from the trustee of the IRA trust after the death of the IRA owner.

(9) The CPA or attorney learns about the IRS post-death trust documentation compliance requirement after the October 31 deadline has passed.

(10) IRS Publication 590-B dated February 19,2020 at page 12 discusses this compliance issue but needs to be expanded and clarified regarding the IRS post-death trust documentation requirement.

(11) To the best of my knowledge the pre Secure IRA Custodial Agreements may not mention the IRS post-death trust documentation compliance requirement. The financial institution may not be required to do so under the existing IRS regulations.

Reality check

My concern is that the IRS post-death trust documentation requirement may not be timely satisfied by the innocent trustee after the death of the IRA owner. This is based in part on the following:

(1) The trustee may have no clue regarding this IRS post-death trust documentation compliance issue. He probably does not read IRS Publications to any extent and relies on his/her accountant and/or attorney for tax advice.

(2) I have assisted a number of practitioners and/or trustee after the death of an IRA owner who had his/her IRA payable to an IRA trust. I found that in every case (more than 10) that the trustee and/or the representative were not familiar with the October 31 deadline. In cases that were sent to me after the deadline was missed, I did advise the trustee not to use the extended stretch payout rules. In other cases that I reviewed prior to the deadline, I advised that the IRS post-death trust documentation be satisfied on time. In several occasions the deadline was satisfied just a few days before the deadline.

(3) In a recent matter, an attorney was advised by a financial advisor to the trustee of the IRA trust that he would open up an IRA trust account but refused to give the attorney any information as to where to send the IRS post-death trust documentation. The trust documentation was ultimately timely filed after the appropriate address of the IRA custodian.

(4) I have conducted over 100 CPE/CLE IRA planning and compliance programs as well as programs for professional organization. I often asked about the IRS post-death trust compliance issue. I have found for the most part that there was a lack of familiarity with the October 31 deadline requirement. I should say that the attendees at the programs were primarily general practitioners.

(5) I do agree that practitioners who are IRA experts are well aware of the IRA compliance issues but generalists in my opinion for the most part may not be. On the death of an IRA owner the IRA expert who is aware of the rules may not be retained but a generalist may be retained who may not be aware of the IRA post-death trust compliance requirement. This may be a problem for the innocent trustee of an IRA trust.

(6) I would agree that there is no easy way to determine the exact amount of IRA trusts in the United States. I would suspect that there are many. One attorney advised me that her old law firm had prepared in excess of 1,000 IRA trusts, another attorney advised me that he had over 150 IRA trusts and several other attorneys had in excess of 25 IRA trusts.

It would be interesting to know if the IRS has the ability to determine the number of IRA trusts in the United States based on the information in the IRS systems.

The issues that are triggered with respect to a noncompliant IRA trust that is receiving distributions from the decedent's IRA over an improper stretch period are:

(1) The innocent trustee of an IRA trust could face significant IRS penalty sanctions.

(2) The trust itself could face significant IRS penalty sanctions.

(3) The beneficiaries of an IRS trust could possibly face significant IRS penalty sanctions.

(4) There is currently no statute of limitations regarding any IRS penalty sanctions in the absence of the trustee filing Form 5329 with the IRS for all relevant years.

(5) The tax preparer of the IRS Form 1041 for the noncompliant IRA trust may have potential professional liability issues as well.

(6) The remedy under the existing rules for a noncompliant IRA trust is to go through a costly analysis of the amount of the improper stretch payment amounts made to the IRA trust and file Forms 5329 with the IRS together with a request for waiver for all relevant years. This would then require that all shortfall distributions from the decedent's IRA account be accelerated and paid to the IRA trust in order to remedy the error.

(7) This is a practical issue since under Secure if an IRA owner died prior to January 1, 2020 having an IRA trust as the beneficiary of his/her IRA account, then upon the death of the appropriate trust beneficiary a ten-year rule is triggered. However, if the IRA trust is a nonqualifying IRA trust to begin with, then in that event the Secure Act provision would not apply to the nonqualifying pre Secure IRA trust.

Suggested solutions

1. Eliminate the IRS post-death trust documentation requirement in its entirety because it serves in my opinion no purpose other than to alert the financial institution that maintains the IRA account that a trust in fact exists.

The financial institution maintaining the decedent's IRA payable to an IRA trust may not in nay opinion arrange to have the institution's legal department review the trust document

2. The IRS should grant relief from the IRS post-death trust documentation failure since an individual innocent trustee may not be aware of the IRS post-death trust documentation requirement.

3. The IRS should grant relief from this innocent oversight if made by the trustee of an IRA trust since the failure to grant relief could have significant adverse tax consequences to the innocent trustee, the trust and the beneficiaries of the trust This is especially true since there is no statute of limitations for transactions that may have been made over a period of many years.

4. Alternatively if the IRS post-death trust documentation requirement is considered necessary by the IRS for any reason then the requirement should apply prospectively for say an IRA owner dying on or after January 1, 2021. If this alternative is used, then Treasury and IRS should mandate that the financial institutions maintaining IRA accounts provide detailed information regarding the requirements of a qualifying IRA trust in their IRA Custodial Agreements.

5. Alternatively the IRS could provide for a simplified self-correction program for nonqualifying IRA trusts. The program could require a reasonable compliance fee and a compliance date by say January 1,2021 for all pie Secure noncompliant IRA trusts.

I have enclosed for your information my credentials as well as two articles that I have written regarding the IRA trust noncompliance issue for your review.

If you have any questions, please feel free to contact me at 516-222-0422 or email me at info.goldbergira@gmail.com.

Sincerely yours,

GOLDBERG & GOLDBERG, P.C.

Seymour Goldberg
Melville, New York

Enclosures

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