The answer depends on the trust agreement and whether or not the couple reside in a community property state. In California (a community property state) each spouse owns 1/2 of the total assets. When the surviving spouse is the trustee, he/she will have the ability to divide the trust in a nonprorata away into a trust for the survivor and one or more trusts for the decedent. If the retirement plan assets are allocated to the survivor’s share, it’s possible for the spouse to roll over the benefits and begin taking RMDs.

In general when the trust is the beneficiary, the IRA remains intact and each year a RMD comes out of the IRA and is deposited into the trust. The RMD is generally based on the life expectancy of the oldest trust beneficiary (usually the spouse). Once the trust has the RMD – you must read the trust agreement to see what happens next. If the trust says to distribute income, you need to know how much of the retirement distribution is income and how much is principal. The trust agreement should define income for this purpose but often it does not. When the trust agreement is silent, you determine the income/principal split based on state law. The income could be 10% of the distribution, 4% of the prior 12/31 balance in the account or be determined some other way.

The income portion is distributed to the beneficiaries and the trust pays tax on the remainder.

Sy Goldberg had a good article on this subject in one of Ed’s newsletters from a few years back.

Mary Kay Foss CPA

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