In a private letter ruling recently, the IRS addressed the issue of transferring an inherited IRA into a Special Needs Trust. The law around taxation of inherited IRAs and the interaction with trusts has been unpredictable and fast-moving for several years now.
Fortunately, this private letter ruling indicates the direction the IRS is headed on two important questions:
First, the transfer to the SNT was not a taxable transfer for estate and gift tax purposes. That's great! It means that if a person with special needs inherits an IRA, we can still do some limited planning without immediate tax consequences.
Second, the trustee was able to stretch out the distributions from the IRA (and therefore stretch out the tax deferral benefits) over the life expectancy of the beneficiary. Another positive result.
Of course, the best result would have been achieved if the decedent had made the IRA payable to the SNT directly. That way, court costs, private letter ruling costs, anxiety, and a "pay back to the state" provision all could have been avoided.
I never thought of doing this, thank you for the tip.
Posted by: leiloni | July 12, 2011 at 01:07 PM