Stretch IRAs to Children

With the exception of hard assets (house, cars, etc.) all of my assets are in IRAs.

I believed my Estate Plan was essentially set with my wife being the primary beneficiary of my IRAs, and my Trust documents dividing my assets into a Marital Trust and a Family Trust. The Family Trust would divide the assets to my children. Upon my wife’s death, any remaining assets of the Marital Trust would comingle into the Family Trust.

An Amendment to the Marital Trust, allows my IRA assets to be transferred into my wife’s own IRA, or to withdraw funds if needed.

I was under the impression that my children would be able to transfer their shares of the Family Trust into their own IRAs, and use their individual life expectancies to “stretch” the IRAs.

I am now being advised, that unless this is specifically spelled out in my Trust documents, they will not be able to “stretch” the IRAs.

Any advice would be greatly appreciated.



If your wife were to have the IRAs transferred to her IRA (removing them from the Marital Trust) she could name the children as beneficiaries of her IRA to achieve what you’d like to happen.

If the IRAs remain in the Marital Trust, the RMDs would be based upon your wife’s life expectancy and when she passes away no further stretch is available.

Some advisors would suggest that you name your spouse as the primary beneficiary and the trust as a contingent beneficiary – that would allow the stretch out if your wife were to predecease you. You would want to check with your estate planning attorney to see if using this strategy would conflict with anything else in your estate plan.



mgtf4cpa,

Thanks for your prompt reply. How long does she have to transfer them to her IRA? By the way, my Trust is the contingent beneficiary.

Jerry



When the surviving spouse is the beneficiary of an IRA there is no time limit that applies if she wants to roll it over to her own IRA. That said, usually the IRA is rolled over by the end of the year after the death unless the spouse is under 59.5. The official rule is that the rollver must be in process before the surivor dies in order to get the stretch out to the children as beneficiaries.



Mary Kay,

Thank you so much. Your explanation really helps.

Jerry



Either the original poster misunderstood his plan, or his plan doesn’t make sense. If his wife is the primary beneficiary, it doesn’t make any sense to say that he amended the marital trust to allow his wife to roll the IRA over. If she survives him, and if she’s the primary beneficiary, then the IRA goes to her, and not to the marital trust.

He might want to name the family (credit shelter) (bypass) trust as contingent beneficiary if his wife survives him but disclaims. In that case, in order for the disclaimer to be effective for tax purposes, there are certain powers that a spouse ordinarily has over a family trust that she can’t have if the trust receives assets by reason of a disclaimer.

The marital and family trusts will only come into being if his wife survives him. If his wife does not survive him, he would likely want to leave his IRAs to or in trust for his children. In that case, if he leaves his IRAs to his children, and depending upon the terms of the trusts for his children if he leaves his IRAs in trust for his children, they should be able to stretch the IRAs over their life expectancies, or at least over the oldest child’s life expectancy.

For more on this, see my article on trusts as beneficiaries of retirement benefits in the March 2004 issue of the BNA Tax Management Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
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gjrubin wrote:

I believed my Estate Plan was essentially set with my wife being the primary beneficiary of my IRAs, and my Trust documents dividing my assets into a Marital Trust and a Family Trust. The Family Trust would divide the assets to my children. Upon my wife’s death, any remaining assets of the Marital Trust would comingle into the Family Trust.

An Amendment to the Marital Trust, allows my IRA assets to be transferred into my wife’s own IRA, or to withdraw funds if needed.

I was under the impression that my children would be able to transfer their shares of the Family Trust into their own IRAs, and use their individual life expectancies to “stretch” the IRAs.

I am now being advised, that unless this is specifically spelled out in my Trust documents, they will not be able to “stretch” the IRAs.



My original Revocable Trust, set up in 1994, makes no mention of IRAs, but sets up the Marital and Family (bypass) Trusts if my wife survives me.

In 2000, we were advised to do an Amendment, which among the changes and additions, an Article was added dealing with IRAs. The preface of the Article states

“If this Trust is named beneficiary of Settlor’s interest in one or more plans which are qualified under Code Section 401(a)or one or more Individual Retirement Accounts qualified under Code Section 408(“Retirement Accounts”) and if one or more Retirement Accounts are distributed in installmentsto a trust which is intended to qualify for the estate tax marital deduction (a “Marital Trust”), then the following provisions shall apply:”

Basically the Trustee then has the option of distributing all income, the RMD, or all of the IRA principal. It further directs the Trustee to assure that it qualifies as a QTIP. It also allows the Trustee to transfer the IRA to an IRA titled in Settlor’s name under Code Section 408, as long as it’s not treated as a taxable distribution for income tax purposes.

The whole idea of this Amendment was to allow my wife to disclaim, and allow my children to receive equal share into their own stretch IRAs. My wife is currently the primary beneficiary of my IRAs, and my Trust is the contingent beneficiary.

Now I’m being told my documents do not do this, and I need a Dynasty Trust. Will this do it automatically, as opposed to my wife having to take care of it after my death? Or do I need something like this Dynasty Trust–period!



Your wife is the primary beneficiary. It wouldn’t make sense for the marital trust to be the contingent beneficiary — she wouldn’t disclaim in favor of the marital trust since that would be estate tax neutral but worse for income tax. You might name the credit shelter trust as the contingent beneficiary so that she could disclaim in favor of the credit shelter trust if the potential estate tax benefits outweigh the income tax disadvantages. You don’t want the revocable trust itself as the contingent beneficiary if she disclaims, since funding a pecuniary share of the revocable trust with the IRA may accelerate the income, and a fractional share is difficult to administer.

If your children, or trusts for your children, were the contingent beneficiaries, then the IRA would go to (or in trust for) your children if your wife does not survive you, or if she survives you but disclaims.

Some trusts require that the trust assets be distributed to the children at some specified age or ages, such as age 35. Back in 1994, most Wills and trusts so provided, because at that time it appeared that you couldn’t give the beneficiary effective control over the trust without causing the trust assets to be included in the beneficiary’s estate.

A dynasty trust is a trust that does not require that the trust assets be distributed to the children. Instead, in a dynasty trust, the assets can remain in trust as long as is permitted by state law. That varies from about 90 or 100 years in about half the states, to forever in some states. Of course, if the trust so permits, the trustees can distribute some or all of the trust’s income and assets to the beneficiaries — it’s just that they need not do so.

Since 1995, it’s been clear that you can give the beneficiary effective control over the trust without causing it to be included in the beneficiary’s estate. For that reason, our clients almost always provide for their children in lifetime (dynasty) trusts rather than outright or in trusts to a specified age or ages.

We also generally suggest that clients review their Wills and trusts periodically. Since it’s been 15 years since you did your estate plan, and 9 years since you made a minor revision, and since it may not be consistent with your current objectives, you may want to review your estate plan with an attorney.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL
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gjrubin wrote:

In 2000, we were advised to do an Amendment, which among the changes and additions, an Article was added dealing with IRAs. The preface of the Article states

“If this Trust is named beneficiary of Settlor’s interest in one or more plans which are qualified under Code Section 401(a)or one or more Individual Retirement Accounts qualified under Code Section 408(“Retirement Accounts”) and if one or more Retirement Accounts are distributed in installmentsto a trust which is intended to qualify for the estate tax marital deduction (a “Marital Trust”), then the following provisions shall apply:”

Basically the Trustee then has the option of distributing all income, the RMD, or all of the IRA principal. It further directs the Trustee to assure that it qualifies as a QTIP. It also allows the Trustee to transfer the IRA to an IRA titled in Settlor’s name under Code Section 408, as long as it’s not treated as a taxable distribution for income tax purposes.

The whole idea of this Amendment was to allow my wife to disclaim, and allow my children to receive equal share into their own stretch IRAs. My wife is currently the primary beneficiary of my IRAs, and my Trust is the contingent beneficiary.

Now I’m being told my documents do not do this, and I need a Dynasty Trust. Will this do it automatically, as opposed to my wife having to take care of it after my death? Or do I need something like this Dynasty Trust–period!



Bruce,

Thank you very much for your replies. We did have our documents reviewed within the past two years, and our local attorney found everything in order. Just recently, however, I attended a seminar on the subject, and then followed up very briefly with the presenter, who suggested otherwise. This is what prompted my questions.

The Credit Shelter, or Family Trust, is the contigent beneficiary. Both of our children are past the age of (40) which triggers distribution of any remaining assets, and neither has children of their own.

I am tempted to let things ride as they are for now, and believe my wife, with proper legal help, will be able to distribute assets to our children, and allow them to stretch their IRAs, after my death.

Thanks again, Jerry



By naming the credit shelter (bypass) (family) trust as the contingent beneficiary, any portion of your IRA that your wife disclaims will go to the family trust, where it will be available for your wife, but will not be included in her estate. The tradeoff for this is that, if she disclaims, the stretchout will be limited to your wife’s life expectancy. In other words, she’ll lose the opportunity to roll the IRA over into her own IRA, potentially convert to a Roth, name new beneficiaries, and get a longer stretchout.

If your wife survives you and disclaims, and upon your death the balance of the family trust goes to your children, that won’t provide any additional stretchout.

It sounds like you may not have dealt with the last pieces — (i) what happens if your wife does not survive you, and (ii) what happens if your wife survives you, disclaims some or all of the IRA in favor of the credit shelter trust, and then disclaims her interest in the credit shelter trust attributable to the IRA?

If your wife does not survive you, and you want the IRA to go to your children, you should name them as the contingent beneficiaries in that event. Otherwise, the IRA will first go to the credit shelter trust (which won’t otherwise be set up if your wife does not survive you). While you’ll likely get to the same place in the end, it may create substantial additional complexity upon your death.

If your wife survives you and disclaims (i) first in favor of the credit shelter trust, and (ii) then also disclaims her interest in the credit shelter trust attributable to the IRA, it’s also possible you’ll get to the same place, but, depending on how it’s drafted, you may end up with your estate as the beneficiary, which would destroy the stretchout. Again, if you want your children to get the IRA in that case, you should name your children as the contingent beneficiaries in that event.

Our clients almost always provide for their children in lifetime trusts rather than in trusts to a specified age (such as 35 or 40). That keeps the children’s inheritances out of their estates for estate tax purposes, and better protects their inheritances against potential creditors (including spouses). There are some complexities to doing so with IRAs, and if your children are already over 40 and have no children of their own, you may not care about this, especially if your children are likely to leave their estates to charity. But since you brought up the subject of dynasty trusts, you may want to consider this.
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gjrubin wrote:

We did have our documents reviewed within the past two years, and our local attorney found everything in order. Just recently, however, I attended a seminar on the subject, and then followed up very briefly with the presenter, who suggested otherwise. This is what prompted my questions.

The Credit Shelter, or Family Trust, is the contigent beneficiary. Both of our children are past the age of (40) which triggers distribution of any remaining assets, and neither has children of their own.

I am tempted to let things ride as they are for now, and believe my wife, with proper legal help, will be able to distribute assets to our children, and allow them to stretch their IRAs, after my death.



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