IRA divided into separate IRAs still tax-exempt.

* Wealthy individuals often establish trusts as beneficiaries for their IRAs. If a trust satisfies the requirements of proposed regulations section 1.401(a)(9)-1, Q&A 5 through 7, the beneficiaries of the trust will be treated as the designated beneficiaries of the IRA and their life expectancies will be used to determine the required minimum distributions.

This allows taxpayers to maximize the tax-deferral period without having to leave the IRA assets directly to their children.

In letter ruling 20008044, the service said such a trust may divide an inherited IRA into four equal IRAs and form trusts with separate trustees without creating a taxable event.

In the ruling, a taxpayer named a trust as his IRA beneficiary. The taxpayer had four children, three of whom survived him. The deceased child had one child. The IRA trust provided that upon the taxpayer's death, the IRA trust's interest in the IRA was to be divided into four equal parts for the benefit of the three children and one grandchild.

Upon reaching 70 1/2, the taxpayer began receiving the minimum distribution based on his and his eldest child's joint-life and last-survivor expectancy. Upon the taxpayer's death, the trustees sought to divide the IRA into four separate accounts so that each of them would have direct control over his or her 25% interest. Such an arrangement would give each trustee more flexibility in investing the funds allocated to a particular beneficiary.

The IRS said dividing the IRA would not affect its tax-exempt status. The service also concluded that any distributions from the four IRAs would not be subject to the 10% excise tax under IRC section 72(t)(1).

--Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.