In PLR 202506004 a decedent had left various retirement accounts to a trust which was to transfer first funds to a charity, with any amounts left over to individual beneficiaries via a trustee-to-trustee transfer. The PLR is looking for rulings on the tax treatment of these transactions.

The facts of PLR 202506004 and the rulings requested from the IRS are as follows:

Facts of the Request

A Decedent created a revocable trust ("Trust") on Date 1, which was amended and restated on Date 2.
At the time of her death on Date 3, the Decedent had multiple retirement accounts ("Retirement Accounts") that named the Trust as the sole designated beneficiary. The Decedent was age A at the time of death.
Article IV.D of the Trust directs the trustee to divide the remainder of the property, including the Retirement Accounts, into shares according to Exhibit A.
Exhibit A of the Trust specifies that a total of n percent of the Trust remainder will be divided among N named individual beneficiaries ("Individual Beneficiaries") in specified percentages (Non-Charitable Share), and m percent will be distributed to charitable organizations selected by the Trustees (Charitable Share).
The Trustees formed a private foundation ("Foundation"), described in § 501(c)(3) of the Code.
The Trust proposes to receive a lump-sum distribution of cash from the Retirement Accounts and pay that cash to the Foundation within the same taxable year.
To the extent that the value of the Retirement Accounts exceeds the value of the Charitable Share, the Trust intends to transfer the remaining amounts to one or more of the N named Individual Beneficiaries via trustee-to-trustee transfers into inherited individual retirement accounts (IRAs). Each inherited IRA will be titled under the Decedent’s name for the benefit of each of the Individual Beneficiaries.
Following the transfer of the Retirement Accounts, the Trustees plan to terminate the Trust within the same taxable year.

Rulings Requested from the IRS

The Trust requested five rulings from the IRS:

Whether the Trust is entitled to a deduction under § 642(c)(1) equal to the amount of gross income considered "income in respect of a decedent" (IRD) included in the Trust’s gross income, resulting from the lump sum distribution of cash from the Retirement Accounts, to the extent it is distributed to the Foundation within the same taxable year.
Whether the transfer (and division) of the Retirement Accounts via trustee-to-trustee transfers into IRAs for the benefit of any of the Individual Beneficiaries of the Non-Charitable Share of the Trust, titled in the name of the Decedent for the benefit of each (instead of titled for the benefit of the Trust), will result in taxable distributions or payments under §§ 402(c) and 408(d)(1) to the Trust.
Whether each of the Individual Beneficiaries can take the required minimum distributions (RMDs) from their inherited IRAs transferred from the Retirement Accounts for the remaining life expectancy of the Decedent using the actuarial table and if each inherited IRA will be independent of any RMDs taken by other Individual Beneficiaries.
Whether the transfer (and division) of the Retirement Accounts by means of trustee-to-trustee transfers into inherited IRAs constitutes a transfer within the meaning of § 691(a)(2). The request also sought a ruling on whether the Individual Beneficiaries of the Non-Charitable Share will include in their gross income the amounts of income in respect of a decedent from their respective inherited IRA when the distribution or distributions from the inherited IRAs are received.
Whether the Individual Beneficiaries of the Non-Charitable Share are separately responsible for any tax liabilities on the required minimum distributions for the tax year subsequent to the year the inherited IRAs are established or the year of death if later, and all subsequent tax years and whether any income taxes or penalties for failure of the Individual Beneficiaries to take their own required minimum distributions for the tax year subsequent to the year the inherited IRAs are established or the year of death if later will be passed to Trust or Trustees.

IRS Rulings

The IRS based its five rulings on specific sections of the Internal Revenue Code (Code), related regulations, and revenue rulings, as detailed below:

Ruling 1

Issue: Whether the Trust is entitled to a deduction under § 642(c)(1) for the amount of gross income considered "income in respect of a decedent" (IRD) when the cash from retirement accounts is distributed to a foundation within the same tax year.
IRS Reasoning:
- Section 642(c)(1) allows a deduction for a trust’s gross income that is paid for a purpose specified in § 170(c), which relates to charitable contributions.
- Section 1.642-1(a)(1) specifies that if a trust’s gross income is paid for a charitable purpose, it is allowed as a deduction.
- The IRS concluded that if the Trust distributes the full lump sum from the retirement accounts to the Foundation within the same tax year, the Trust is entitled to a deduction under § 642(c)(1) equal to the IRD included in the Trust’s gross income from that distribution.

Ruling 2

Issue: Whether the transfer of retirement accounts via trustee-to-trustee transfers into inherited IRAs for the individual beneficiaries would result in taxable distributions or payments under §§ 402(c) and 408(d)(1).
IRS Reasoning:
- Section 408(d)(1) generally states that any amount distributed from an IRA is included in gross income by the payee.
- However, Revenue Ruling 78-406 clarifies that a direct trustee-to-trustee transfer of funds from one IRA to another does not constitute a distribution to the participant, even if it is at the IRA holder’s request. This ruling applies to transfers after the death of the IRA owner if the new IRA is set up and maintained in the deceased’s name for the benefit of the beneficiary.
- Section 402(c)(1) states that an eligible rollover distribution from a § 401(a) qualified retirement plan that is transferred into an eligible retirement plan is not included in gross income.
- Section 402(c)(11) describes the rules for distributions to inherited IRAs for non-spouse beneficiaries. It states that a trustee-to-trustee transfer to an IRA for a designated beneficiary is treated as an eligible rollover distribution, and the IRA is considered an inherited IRA.
- Therefore, the IRS concluded that the trustee-to-trustee transfers of the Retirement Accounts into inherited IRAs for the Individual Beneficiaries, titled in the name of the Decedent for the benefit of each beneficiary, would not result in taxable distributions or payments under §§ 402(c) and 408(d)(1) to the Trust.

Ruling 3

Issue: How required minimum distributions (RMDs) should be calculated for the inherited IRAs of the Individual Beneficiaries, and whether each IRA would be independent of the others.
IRS Reasoning:
- Section 408(a)(6) and its regulations apply the rules of § 401(a)(9) to the distribution of an individual’s entire interest in an IRA.
- Section 1.408-8, Q&A-1(a) specifies that an IRA is subject to the required minimum distribution rules of § 401(a)(9).
- Section 401(a)(9)(A) states that a plan is not qualified unless the entire interest of an employee is distributed by the required beginning date, or over the life or life expectancy of the employee and a designated beneficiary.
- Section 401(a)(9)(B)(i) specifies that if the employee dies after distributions have begun, the remaining interest must be distributed at least as rapidly as the method being used at the time of death.
- Section 401(a)(9)(E) defines a designated beneficiary as an individual designated by the employee.
- Section 1.401(a)(9)-4, Q&A-3 states that only individuals can be designated beneficiaries.
- Section 1.401(a)(9)-4, Q&A-4 specifies that to be a designated beneficiary, an individual must be a beneficiary as of the date of the employee’s death.
- Because the Trust was named as the beneficiary of the Retirement Accounts and a trust is not an individual, the Retirement Accounts were treated as having no designated beneficiary.
- Section 1.401(a)(9)-5(a)(2) states that if an employee dies after the required beginning date without a designated beneficiary, distributions must be made over the employee’s remaining life expectancy.
- Section 1.401(a)(9)-5(c)(3) states that the distribution period is based on the employee’s age in the year of death.
- Section 1.401(a)(9)-8, Q&A-2 specifies that if an account is divided into separate accounts for different beneficiaries, the rules of § 401(a)(9) are applied separately to each account.
- The IRS concluded that the Individual Beneficiaries could take RMDs from their inherited IRAs based on the Decedent’s remaining life expectancy, using her age in the calendar year of her death. Each inherited IRA is independent of the others when determining the RMD.

Ruling 4

Issue: Whether the transfer of retirement accounts into inherited IRAs constitutes a transfer under § 691(a)(2), which would trigger income recognition, and who is responsible for including the IRD in their gross income.
IRS Reasoning:
- Section 691(a)(1) requires the inclusion of IRD in the gross income of the estate, the person who acquires the right to receive the amount due to death, or the person who receives it by bequest, devise, or inheritance.
- Section 691(a)(2) specifies that if a right to receive IRD is transferred, the fair market value of the right at the time of transfer is included in the gross income of the transferor. However, this does not include transmission at death or a transfer to a person pursuant to their right to receive the amount due to the death of the decedent.
- Section 1.691(a)-4(b) states that if the right to IRD is transmitted to another person who will include that income when received, a transfer within the meaning of § 691(a)(2) has not occurred.
- Section 1.691(a)-4(b)(2) clarifies that if an estate transfers the right to IRD to a beneficiary, only the beneficiary includes that income in gross income when received.
- The IRS concluded that the transfer of Retirement Accounts to inherited IRAs is not a transfer under § 691(a)(2), so it would not trigger income recognition for the Trust. The Individual Beneficiaries would include the IRD from their respective inherited IRAs in their gross income when they receive distributions.

Ruling 5

Issue: Who is responsible for the tax liabilities on RMDs from the inherited IRAs.
IRS Reasoning:
- The IRS concluded that each Individual Beneficiary of each inherited IRA is separately responsible for any tax liabilities related to the RMDs from their inherited IRAs for the tax year subsequent to the year the inherited IRAs are established or the year of death if later, and for all subsequent tax years. No income taxes or penalties for failure of the Individual Beneficiaries to take their own required minimum distributions for the tax year subsequent to the year the inherited IRAs are established or the year of death if later will be passed to Trust or Trustees.

In summary, the IRS rulings were based on a detailed interpretation of the relevant sections of the Internal Revenue Code, related regulations, and revenue rulings. The IRS applied these provisions to the specific facts and circumstances provided in the request to determine the tax consequences of the proposed transactions. The IRS made it clear that the rulings were based on the facts and representations provided by the taxpayer and subject to verification on examination.

Prepared with assistance from Notebook LM.

You can read this ruling at https://www.irs.gov/pub/irs-wd/202506004.pdf