Trust as IRA Beneficiary
We have a client who would like to have their daughter as beneficiary of their IRA; however, they do not want to name her directly because she is a minor. Therefore, they wish to name a trust as beneficiary. The only problem is that they wish to use the following wording for the beneficiary designation:
[i]The then Trustee under an Agreement and Declaration of Trust dated April 23,2008, by Jane Doe, as Donor and the Trustee, or if said Agreement is not in existence at the death of Jane Doe, the Estate of Jane Doe.[/i]
We have cautioned the client and her lawyer that this would name the [i][b]Trustee [/b][/i]of the Trust and [u]not the Trust [/u]as beneficiary. The lawyer has come back furious that we’ve questioned this language because, in her words, according to CT state law, the Trust cannot be a beneficiary of an IRA (b/c the Trust cannot own property).
If the IRC will allow a Trust to be the beneficiary of an IRA, how can state law even come into play? Can you offer any insight into this beneficiary designation issue?
Permalink Submitted by Denise Appleby on Wed, 2008-07-23 21:22
[quote=”alanna.crawford”]We have a client who would like to have their daughter as beneficiary of their IRA; however, they do not want to name her directly because she is a minor. Therefore, they wish to name a trust as beneficiary. The only problem is that they wish to use the following wording for the beneficiary designation:
[i]The then Trustee under an Agreement and Declaration of Trust dated April 23,2008, by Jane Doe, as Donor and the Trustee, or if said Agreement is not in existence at the death of Jane Doe, the Estate of Jane Doe.[/i]
We have cautioned the client and her lawyer that this would name the [i][b]Trustee [/b][/i]of the Trust and [u]not the Trust [/u]as beneficiary. The lawyer has come back furious that we’ve questioned this language because, in her words, according to CT state law, the Trust cannot be a beneficiary of an IRA (b/c the Trust cannot own property).
If the IRC will allow a Trust to be the beneficiary of an IRA, how can state law even come into play? Can you offer any insight into this beneficiary designation issue?[/quote]
Hi Alanna,
Naming “The Trustee of the Jane Doe Something Trust” is the same as naming the “Jane Doe Something Trust” as the beneficiary. From what I have seen, lawyers usually word the designation in that manner.
Permalink Submitted by Bruce Steiner on Thu, 2008-07-24 15:49
A corporation, partnership or limited liability company is an entity, and can own property. But while we colloquially refer to trusts as owning property, trusts don’t own property. Instead, trustees own property in their capacity as trustees.
Permalink Submitted by Alan Spross on Thu, 2008-07-24 16:12
Bruce,
So it has evolved that a trust named as beneficiary is really just technically incorrect shorthand for taking the extra step and naming “the trustee of the trust dated xx/xx/xxxx”? A blanket registration that will then include any changes of trustee without amending the trust
beneficiary?
Does this issue take on added significance after the owner’s death and the proper payee must be entered on distribution checks?
Permalink Submitted by Denise Appleby on Thu, 2008-07-24 21:35
Despite the beneficiary designation being “ The trustee of the _____trust…”, checks are usually issued to the “The _______trust”, and not “ The trustee of the _____trust…”. Of course, as to whether that is correct, I defer to Bruce. Bottom-line though is that banks will honor the checks for deposit to the trust account, if the check is made payable to “The _______trust”. They should also honor checks made payable to “ The trustee of the _____trust…” , although that usually causes problems. An overly cautious teller may misinterpret “ The trustee of the _____trust…”, to mean that it is the trustee that is the payee, unless he works in a trust department and is familiar with the registration
Another point to consider is that the checks are issued ( by default) to correspond with the registration of the account, which is usually “The _______trust” and not “ The trustee of the _____trust…”.
Permalink Submitted by Bruce Steiner on Thu, 2008-07-24 21:48
The registration will probably show both the names of the trustees and the name of the trust, and whether it was created under a trust agreement dated [fill in date], or under the Will of [fill in testator’s name].
The trustee can open an account in the same financial institution where he/she maintains the inherited IRA, in which case the IRA distributions can be transferred directly from the IRA to the trust’s account, without the need for a physical check.
Permalink Submitted by Denise Appleby on Thu, 2008-07-24 21:52
Right. I forgot to include that the name of the trustee is included in the account registration and on any checks issued to the trust.
Thanks
Permalink Submitted by Alanna Crawford on Fri, 2008-07-25 15:43
Thank you all so much for your insight! I’m still a little confused though. After reading through your comments it appears as though the trustee of the trust, and not the beneficiary, would be the recipient of the trust’s assets.
Please forgive my confusion. I’ve just been looking at 1.401(a)(9) and it clearly states that if the beneficiary of the trust is an individual, they [the beneficiary] will be viewed as having been the designated beneficiary. Based on this, I don’t see how the trustee comes into play, other than for handling administrative issues.
Any clarification?
Thanks!
Permalink Submitted by Al Fry on Fri, 2008-07-25 18:17
The trustee gets the money for the trust, however the oldest beneficiary of the trust’s age is used for the calculation of the RMD. That is what they mean.
Permalink Submitted by Emilyrae Helfen on Wed, 2008-07-30 16:44
I have just finished preparing a Revocable Living Trust. My trust attorney said that retirement funds ,ie IRA, 401K etc are covered in the RLT by making them beneficiary. This puts the money in the trust. My husband and I are co-trustees of the RLT.
When I tried to do this at Schwab, he said making the RLT the beneficary makes it a full distribution and a taxable event. I am not sure if he meant when I transferred it initially, or upon my death when the trust would come in force. I think he meant upon my death – because with a RLT, it can be changed at any time until death. He said he would check with his financial people – he thinks there is specific wording that can avoid that – I also have a phone call in to my trust attorney – but I always go to more than on source to get my answers. This looks like a good site. Does Ed answer any of these questions.
Permalink Submitted by Bruce Steiner on Wed, 2008-07-30 23:34
Depending upon what the trust says, the trustees may be able to stretch the distributions out over the life expectancy of the oldest beneficiary of the trust. In that case, the entire IRA would not be taxable upon your death.
I wrote an article on this for the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
Permalink Submitted by Al Fry on Thu, 2008-07-31 00:24
You cannot transfer it while still living.
Permalink Submitted by Alan Spross on Thu, 2008-07-31 01:14
I think you need to speak with a specialist in Schwab Retirement Services who is familiar with trusts as IRA beneficiares. It sounds like so far you have been talking to a service rep who is not qualified in this area.
The basic requirements for a trust to be qualified for look through treatment so that the beneficiaries can use their individual life expectancies is in Pub 590, on p 39.