Transferring IRAs into a Living Trust
My parents have 2 IRAs. One in my mother’s name. She is 79 years of age and one in my Father’s name, he will be 82 years of age on March 31st. They have just completed all of the paper work with their lawyer to create a living trust for my brother and I in case something should happen to them.
My question is, should they pursue the task of getting these IRAs covered by the trust or should they just name my brother and I as beneficiaries??
THANKS
Permalink Submitted by Alan Spross on Mon, 2008-03-24 21:46
They should name you directly unless there is some specific reason not to. Such reasons could include such things as:
1) Desire to shield the IRA assets from creditors, for example in a divorce or litigation situation.
2) Desire to control the rate of distribution of IRA assets to beneficiaries instead of giving them complete control. The control mechanism would be part of the trust wording as the IRA distributions were paid to the trust.
3) Keeping the IRA assets out of the estate of the beneficiaries for estate tax purposes.
If you and your brother are close in age and the trust is qualified for look through treatment, you would still get the benefit of stretching RMDs as the oldest beneficiary’s life expectancy will apply. But if the main reason for the trust is to avoid probate, that is not needed with an IRA account since probate is already avoided if the account is not left to the estate.
Permalink Submitted by Bob Gibb on Tue, 2008-03-25 02:51
You should read pages 120 – 121 in Parlay Your IRA into a Family Fortune by Ed Slott. Ed tells about the signficant tax cost of taking funds from the IRA and putting them into the living trust. He says that the withdrawal is fully taxable taking a huge bite of the retirement savings.
Bob
Permalink Submitted by Bruce Steiner on Tue, 2008-03-25 18:27
It’s unlikely that the living trust would be the best choice for the beneficiary. Whether the living trust is better or worse than the children as beneficiaries depends on the terms of the living trust and their objectives. They should discuss the choice of beneficiaries with their lawyer while they’re in the process of doing their estate planning.
I’m a bit troubled, though, that the lawyer didn’t raise the subject in the course of doing the estate planning. That illustrates one of the problems with living trusts. Living trusts are generally tax-neutral. In other words, they don’t save or cost any taxes. And in most cases (perhaps other than in California) they don’t significantly make the estate easier to administer. But they often tend to be a distraction. Perhaps had they not gotten distracted by the living trust concept, they might have focused on the more important issues, such as the IRA beneficiaries.