Transferring inherited IRA to grantor trust during life.

IRS Letler Ruling 200620025 addressed the transfer of an IRA inherited by a disabled beneficiary to a "special needs" grantor trust to be established for the beneficiary's benefit, with state court approval to preserve the beneficiary's Medicaid benefits. The Service held that the transfer to the trust will not be treated as a sale or disposition of the IRA, nor give rise to income recognition under the Code's rules for income in respect of a decedent. The IRS also ruled that the required minimum distributions paid to the trust from the IRA could be calculated using the disabled beneficiary's age.

Although the grantor trust transfer in the ruling did not generate any adverse tax consequences, tax advisers should exercise considerable caution in using this strategy for Medicaid planning purposes, because the Medicaid eligibility rules can vary from state to state. The ruling is available at www.irs.gov/pub/irs-wd/ 0620025.pdf.

by Lisa A. Winton, MBA, MST, AICPA Technical Manager-Taxation, Washington, DC