Trust as IRA beneficiary, tax consequences of splitting
IRA is currently a trust beneficiary IRA. The trustees will soon be splitting the trust IRA and transferring the split IRA to the beneficiaries of the trust. The trustees are concerned about potential tax consequences about doing this incorrectly with the main issue having to do with some ambiguity in the trust as to whether or not the trust can be terminated. Here’s the question: if the trustees split up the trust beneficiary IRA, transfer the new IRAs to the beneficiaries and then close the estate, is there a danger that the IRS may consider this a taxable distribution if it is later discovered that the trust was never supposed to be closed to begin with? Would there be any other ramifications?
Thanks for your help.
Permalink Submitted by mk foss on Thu, 2009-08-06 00:44
There are private rulings that allow an executor to allocate an IRA to beneficiaries so an estate can close.
In Natalie Choate’s book “Life and Death Planning for Retirement Benefits” there is a sample letter that can be used to notify the custodian when a trust terminates and the account is being split among the beneficiaries.
As a practical matter, I haven’t seen IRS get involved in how an estate closing is handled for income tax purposes. If the trust isn’t supposed to terminate and it is terminated, problems are more likely to arise from family members of the deceased or other interested parties.
You still must be careful with titling, etc so that the plan is not taxed prematurely.
Permalink Submitted by Alan Spross on Thu, 2009-08-06 01:06
I agree with Mary Kay. This is not so much a tax issue as it is a legal issue if another trust beneficiary is harmed.
For example, suppose the decedent left the IRA to the trust because of creditor concerns of a particular beneficiary, but the trustee terminates the trust prematurely and the IRA is assigned. The suspect beneficiary then gets sued and the inherited IRA balance is forfeited. During these proceedings this beneficiary finds out that the IRA balance would have been protected if left in the trust and determines that the trust should not have been terminated. Beneficiary then proceeds against the trustee for damages, and the trustee then can only hope that any waiver they got signed by the beneficiaries holds up in court.
Permalink Submitted by Bruce Steiner on Thu, 2009-08-06 03:07
Can the trust be divided into separate trusts for each beneficiary?
Permalink Submitted by Jack Thomas on Thu, 2009-08-06 04:37
Not sure if the trust can be divided into separate trusts for each beneficiary. If it could, would that make a difference in how the trustees should proceed?
Permalink Submitted by William Reynard on Wed, 2009-09-30 14:21
If someone names an Estate as beneficiary, and the Estate establishes a Trust, does that kill the stretch benefit for the IRA trust beneficiary?
Permalink Submitted by Bruce Steiner on Wed, 2009-09-30 14:26
Generally yes. Why not name the trust(s) under the Will as the beneficiary(ies), rather than the estate?
Permalink Submitted by William Reynard on Wed, 2009-09-30 14:45
That is what I proposed to my colleague for his client. But I wanted to double-check that. I would assume that naming an estate, despite the direction of the Will, automatically kills the stretch ability. But of course if he is 70 1/2, it becomes less of an issue because his daughter (assuming the trust is put together correctly) would still get his remianing life up to 15.3 years. And I am assuming too that since it does go to the Estate first, it technically could be at the risk of creditors before is assumes its title of Estate IRA. Right?
Permalink Submitted by Bruce Steiner on Wed, 2009-09-30 14:54
It’s still an issue. If it goes to a trust for the benefit of the daughter, it can be stretched over the life expectancy of the oldest beneficiary of the trust, most likely the daughter or someone close in age to her.
And yes, assets payable to the estate are generally subject to the decedent’s creditors.