In 2006, the IRS issued Private Letter Ruling 200620025 in which the IRS approved of the transfer of an Inherited IRA to a special needs trust (“SNT”) that was a grantor trust for income tax purposes. The 2006 ruling indicated that one of four surviving sons of the decedent was disabled and the four sons were named as IRA beneficiaries. A state court established a SNT for the disabled son and the guardian and trustee of the SNT intended to transfer the disabled son’s share of the Inherited IRA to an Inherited IRA benefiting the SNT and its beneficiaries. One of the issues was whether the transfer of the Inherited IRA from the disabled son to the SNT was a transfer that required the recognition of income by the disabled son under IRC Section 691(a)(2). By applying the grantor trust rules, the disabled son was treated as the owner of the assets held by the SNT. Consequently, the IRS held that the transfer of the Inherited IRA to the SNT was not a sale or disposition of the Inherited IRA for federal income tax purposes.
Conversely, on April 29, 2011, in Private Letter Ruling 201117042, the IRS noted that a financial institution correctly stated that an IRA (not an inherited IRA) cannot be set up and maintained in the name of a grantor trust. In this ruling request, pursuant to a court order, a SNT was established for an individual that was determined to be disabled. The court specified an amount that was to be transferred to the SNT, which was a grantor trust. The amount ordered to be transferred to the SNT corresponded to the balance in the individual’s IRA. The IRA custodian refused to process the paperwork to transfer the IRA from the individual to the SNT stating that the IRA could not be maintained in the name of the SNT. As a result, the entire IRA was deemed to have been distributed to the individual and the proceeds deposited into a non-IRA account owned by the SNT even though the individual intended to continue his IRA. The ruling request was submitted to obtain a waiver of the 60-day IRA rollover requirement, so that the IRA could be restored to an IRA held in the individual’s name and not in the trust. Prior to ruling on the waiver of the 60-day requirement, the IRS briefly stated that the custodian correctly noted that an IRA cannot be set up and maintained in the name of a grantor trust.