Creating a Life Estate in an IRA Account

What is the proper beneficiary designation to create a “life estate” in an IRA account for a surviving spouse, or is a conduit trust necessary to accomplish same? Situation is second marriage with children from a previous marriage — IRA holder wants surviving spouse to be beneficiary of account during life, but wants remaining balance to go to holder’s children from prior marriage. I don’t know if the complicated calculation I have come up with to determine a life estate (life expectancy years of survivor times RMD, adjusted for growth and present value, etc. as percentage to spouse, remaining percentage to kids) would even work in this situation, but even if so, such a calculation might not be acceptable as a designation. Is it possible to say in the designation that the trustee of a family trust would determine the beneficiary percentages (and the trust would tell the trustee how to calculate it)? Any other ideas? Thanks in advance for any light that anyone can shed on this for me.



You could do it either way.

You could name the spouse as the beneficiary of a percentage of the IRA, and the children (or trusts for their benefit) as the beneficiaries of the remaining percentage of the IRA. You could determine the percentages by a formula, though it would be simpler to specify the percentages and change them from time to time if desired.

Alternatively, you could leave the entire IRA to a trust for the benefit of the spouse and children. The trust could be a marital (QTIP) trust where the spouse gets all the income during her lifetime (and, if desired, principal in the trustees’ discretion), and upon her death the balance of the trust goes to or in further trust for the children. Or the trust could be a family trust where the trustees have discretion to distribute the income and principal to the spouse and children (or only to the spouse), and upon her death the balance of the trust goes to or in further trust for the children.

The advantages of the first approach are that (i) the spouse can roll her portion over into her own IRA, (ii) the spouse and the children don’t have to deal with each other regarding this asset, (iii) the children can stretch their shares out over their life expectancies (or at least the oldest child’s life expectancy), and (iv) the children don’t have to wait until the spouse dies to get their share. The advantages of the second approach are that (i) the entire IRA can qualify for the marital deduction, and (ii) all of the benefits are available for the spouse if needed, but (if the trust is a family trust) nothing need be paid to the spouse unless she needs the money.

The conduit trust gives the spouse control over more assets, so it probably won’t make sense here. Indeed, the conduit trust rarely if ever makes any sense. I don’t understand why it’s gotten so much attention.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL



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