Revocable Trust
A Father, age-76, dies. He has 2 IRA’s, 1 brokerage account.
IRA’s name a Revocable Trust as beneficiary.
Revocable trust naming (Father) himself as trustee.
Since Father dies. Trust names 1 Son as successor trustee.
Trust names all remaining children as beneficiaries, 4 sons which includes the successor trustee.
The 4 sons want to know what their distribution options are.
2 of the sons do not want any money now, they want to delay taxes as long as possible and at the lowest level possible.
1 son wants partial money now and the rest later as long as he can wait.
Last son (successor trustee) wants all money now.
What are the options available for distribution? Can the IRA’s be “stretched”? How should RMD be handled, based on who’s age, etc..
Thank you.
Permalink Submitted by Alan Spross on Wed, 2007-08-22 03:25
This all depends on two characteristics of the trust document:
1) Does it meet the requirements for qualification for look through treatment? These are listed in Pub 590, p 38.
2) Is the trust a conduit trust or a discretionery trust which gives the successor trustee discretion to accumulate income in the trust?
The expected combination of the above would be that the trust is qualified and calls for current distribution of RMD income. In that case, the RMD for the IRA would be based on the oldest individual trust beneficiary. The successor trustee could order that RMD for the 2 sons, and the desired amount for the other two and pass the income through on a K1 to each beneficiary. Obviously, the bookeeping gets difficult because of the son who wants the partial. If the trust can be terminated under it’s terms, which usually are not very specific, then the IRA can be assigned to the remaining beneficiaries. However, they still cannot use their own life expectancies, and each separate inherited IRA account created must continue to adhere to the initial RMD schedule.
The lump sum distribution of the successor trustee’s share should also satisfy any RMD requirement of the father that he did not take prior to death. Any basis he had in his IRAs should be split equally among the beneficiaries.
If the successor trustee order a lump sum distribution for all beneficiaries when it is not required, he is setting himself up for legal problems and could be made personally liable for the tax impact on the others.
Permalink Submitted by Robert Meyers on Wed, 2007-08-22 18:32
Alan, thanks for the reply.
1. The trust is revocable and does not meet requirements of qualified.
The successor has decided to transfer the IRA’s into a Decendant or Beneficiary IRA and then take distributions from this account to satisfy any needs the sons have for income now and then the remaining account balance could continue to be tax deferred and they will take RMD each year based on RMD requirements for deceased father.
Permalink Submitted by Alan Spross on Thu, 2007-08-23 02:59
Typically, these become irrevocable upon the death of the grantor, and if so would be qualified if it meets the other requirements.
Permalink Submitted by Robert Meyers on Thu, 2007-08-23 13:59
Alan – thanks again.
Does the trust still become irrevocable if it does not say so either way?
Permalink Submitted by Alan Spross on Thu, 2007-08-23 20:22
It depends on what the trust says and state trust law. Look for a paragraph that may be seceral pages into the instrument titled “Power to Amend Trusts” or similar.
Permalink Submitted by [email protected] on Thu, 2007-08-23 21:00
If it is like many RLTs, it probably became irrevocable at his death.
Permalink Submitted by Bruce Steiner on Fri, 2007-08-24 02:34
Even if the grantor retained the power to amend or revoke the trust after his death, if he amends or revokes it from the next world after his death, we won’t know about it.
Without seeing the trust agreement, it’s hard to know exactly what it says. But chances are there’s some way to divide it into separate trusts for each of the 4 beneficiaries, so that the trustees can invest each trust separately, and can take larger or smaller distributions from each one as appropriate. The attorney handling the estate should be able to advise as to this.
Unlike one of the previous responses, I don’t think it’s typical for a trust to provide that the trustees have to distribute the required distributions to the beneficiaries. Such a requirement rarely if ever makes any sense. If the beneficiary lives to life expectancy, none of the IRA benefits will remain in the trust (where they can be protected against the beneficiary’s potential creditors, including spouses, and can be kept out of the beneficiary’s estate for estate tax purposes). But again, it doesn’t matter what might or might not be typical — the attorney should read the provisions of this particular trust instrument and advise as to how best to accomplish the client’s objectives.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL