In Advisory Opinion 2009-02A, the Department of Labor (the "DOL") was faced with the question of whether an estate planning arrangement, set up to handle distributions from an IRA at death, would give rise to a prohibited transaction under Section 4975 of the Internal Revenue Code (the "Code").
Under the estate plan in question, a trust (the "Trust") was established by the grantor (the "Grantor"), with the Grantor as the current trustee, his son as the successor trustee (the "Successor Trustee") and his grandson as sole the beneficiary (the "Beneficiary"). The Grantor designated the Trust as the sole beneficiary of his IRA. The Trust would not receive any assets, other than those distributed to it from the IRA. Under the Trust, the Successor Trustee was required to determine the required minimum distribution for each calendar year from the IRA (under Code Sections 401(a)(9) and 408(a)(6)), and the Trustee, and then the Successor Trustee, could request a distribution from the IRA to the Trust in excess of the required minimum distribution. Under New York State law, the Trust could pay commissions, out of the IRA assets distributed to the Trust, to the Successor Trustee for serving as such. The amount of the commissions were based on the value of the assets held by the Trust.
The specific question addressed by the DOL was whether either a distribution from the IRA to the Trust, or a payment of commission by the Trust out of IRA assets distributed to it, would constitute a prohibited transaction under Section 4975 of the Code. The DOL noted that Section 4975(c)(1)(A) prohibits any direct or indirect sale or exchange, or leasing, of any property between an IRA and a disqualified person. Section 4975(c)(1)(D) prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of an IRA. Section 4975(c)(1)(E) prohibits a fiduciary from dealing with the income or assets of an IRA in his or her own interest or for his or her own account. The DOL further noted that, for these purposes, the Grantor and Successor Trustee would each be a fiduciary and disqualified person of the IRA, and that the Trust would be a disqualified person of the IRA.
The DOL concluded that no distribution from the IRA to the Trust would be a prohibited transaction. This obtains because Section 4975(d)(9) of the Code provides that the receipt by a disqualified person-here the Trust- of any benefit to which such person may be entitled as a beneficiary of an IRA is not a prohibited transaction under Section 4975(c), so long as that the benefit is computed and paid on a basis which is consistent with the terms of the IRA as applied to all other beneficiaries, which is contemplated here. Furthermore, a decision made on behalf of the Trust to make an otherwise permissible benefit distribution from the IRA to the Trust, in accordance with the terms of the IRA, is not an act which is prohibited by Sections 4975(c)(1)(D) and (E) of the Code.
The DOL also concluded that the payment of the commissions from the Trust to the Successor Trustee would not result in a prohibited transaction. This is because a decision by an IRA owner-here the Grantor- to adopt an estate planning program that contemplates permissible IRA distributions being made into a separate non-IRA trust, which-as here- is designed to provide monetary or tax benefits to himself or his family members, is not an act described in, or prohibited by, Sections 4975(c)(1)(D) and (E) of the Code. Further, the Successor Trustee would not be acting as a fiduciary of the IRA in deciding whether and how much to distribute from the IRA into the Trust, so long as the IRA distributions are computed and paid on a basis which is permissible under the Code and consistent with the IRA's terms, which, again, is contemplated here. As such, those decisions, even though influencing the amount the Successor Trustee will receive as commissions from the Trust, would not be result in any prohibited transaction under Section 4975.