I rarely write about specific tax rulings, particularly private letter rulings (this is PLR 202125007), but this one is just too packed with lessons to pass up. In this situation, a lifetime of accumulation winds up being unnecessarily whacked with taxes simply because of procedural errors and lack of planning or good advice.
Mom names a trust as beneficiary of her IRA (which she rolled over from her deceased husband) and named her two kids as trustees and beneficiaries of the trust. Mom died, leaving the IRA funds to the trust. As trustees, the kids decide they don't like the way the funds were invested and want to trade individual stocks, but the custodian says the existing account cannot accommodate stock trades. The kids then decide to move the inherited IRA assets to a non-IRA brokerage account, also held by the trust.
And just like that, instead of being able to spread the IRA withdrawals over 10 tax years, the full value of the IRA became taxable immediately! Once this result was revealed to the kids, they then added wasteful on top of ignorant by requesting a PLR to have the IRS allow them to unwind the distribution and reinstate the Inherited IRA.
The IRS' Ruling
Nope. The IRS highlighted the fact that once funds are removed from an Inherited IRA, there is no mechanism to return them. This is different from an IRA owner, who can withdraw from their own non-inherited IRA and return the funds within 60 days via rollover. Incidentally, even if there was a 60 day rollover provision for Inherited IRAs, the ruling notes that several months passed between the distribution and the request, so they wouldn't have qualified even then.
Knowing the rules is important. Stopping to get advice based on the situation could have saved tons in taxes. A much better tax outcome AND the client's desire to trade stocks could certainly have both been accomplished by transferring directly (trustee-to-trustee) from the old Inherited IRA to another Inherited IRA that would allow the desired investments.
Trust planning comes with greater tax issues. This distribution is taxable to the trust and trusts have very narrow tax brackets, meaning they reach the top tax bracket after very little income. We don't know, but maybe the trust will be able to pass the income to the kids and taxed at more favorable rates (a better tax outcome), but that would seem to conflict with the some non-tax reason(s) for leaving it in trust.
Custodians only tell you so much and they seek to avoid giving tax advice. In this case, the custodian seemed to answer the client's need for trading without advising on the tax consequence. Custodians are pretty good at answering procedural questions and telling you what you can do, but will not advise what you should do. That's the job of a qualified advisor.
Don't be wasteful on top of ignorant. The kids made an expensive mistake even more so by requesting a PLR for a well-settled matter in tax law. PLRs are expensive, usually well above $10,000. PLRs don't give these details, but I'm guessing this was a pretty sizable IRA for this kind of Hail Mary to be paid for by the kids.
To paraphrase the famed oil rig firefighter Red Adair, "If you think it's expensive to get professional advice, wait until you hire an amateur, or yourself."
Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.