Trust as IRA Beneficiary
Hi,
We have a client whose mother recently died. The trust is named as the primary beneficiary and the three children as contingent. The custodian is retitling the IRA from the decedent’s name to the name of the trust and will then distribute each of our client’s sibling’s portions, per the terms of the trust and their wishes and knowledge that taxes will be owed. Our client does not want to take the distribution so I would like to get some guidance on what his options ares now and what the implications are later. My understanding is that the IRA must remain in the name of the trust b/c retitling to our client’s name would constitute a distribution. Later, when he does wish to withdraw part or all assets within it, our client will then pay the taxes as usual when withdrawing IRA assets. The part that seems tricky is the fact that only the executor (our client’s sister) can sign anything to authorize withdrawals and so our client is reliant on his sister to access his portion? Is there no way to roll his portion into a non-spouse IRA in his name (we have not yet seen the trust document yet but expect it will have pourover provisions)? The other concern is RMD’s-we have not yet been able to verify with our client whether his mother had begun RMD’s but we expect this to be the likely case. I appreciate any help you can offer. Thanks.
Permalink Submitted by Alan Spross on Sat, 2011-02-05 18:36
The terms of the trust will govern the client’s options assuming the trustee understands and complies with those terms. If the trustee does not, she can be forced to through legal action. If this is just a living trust that can be allowed to terminate under it’s provisions, the IRA can be assigned to the trust beneficiaries after termination. Until the trust is allowed to terminate any distributions must be made to the trustee who will then pass the distributions through on a K1 or if the trust allows retain them in the trust.
There are requirements to be met if the trust is to meet the requirements for look through treatment, ie the beneficiaries will be treated as designated beneficiaries with respect to RMDs, although the separate accounts rules do not apply to trust beneficiaries. This results in the oldest trust beneficiary determining the RMD divisor for all beneficiaries. This is particulary critical if the mother passed prior to her RBD, as in that case an unqualified trust would result in the 5 year rule applying to RMDs. If mother passed on or after her RBD and the trust was not qualified, the mother’s remaining life expectancy could be used for RMDs.
Best case scenario here is that the trust is qualified and allowed to terminate. If so, there is time to complete this before any RMDs need to be distributed. Separate beneficiary accounts can then be created and the first RMDs distributed directly to each beneficiary. Each beneficiary can also withdraw as much in addition to the RMD as they wish, but since the trust was the named beneficiary on the IRA the beneficiaries are still stuck with the life expectancy of the oldest. Taxes will be due for the year the RMD or other distributions are made. If the mother has basis in her IRA, then part of all distributions will be tax free and the basis issue should be investigated.
Note that once a distribution is made to either the trust of afterwards to a beneficiary, it cannot be rolled over and is taxable. So there is exposure here if the trustee does not understand this and requests a lump sum IRA distribution or any distribution that is larger than the RMD requirement.
SItuation gets more complex if one of the siblings has creditor problems or special needs issues, since that beneficiary may be better off if the trust remains in place for them. But this in itself does not mean that the proper share of the IRA cannot be assigned directly to the other beneficiaries if their interests can be distributed from the trust.
Permalink Submitted by Bruce Steiner on Sun, 2011-02-06 00:17
What is “the trust”? If it’s payable to a trust, the trustees control it, not the executor. Assuming the requirements are satisfied, the trustee can stretch the distributions over the life expectancy of the oldest beneficiary of the trust. If there are 3 children, does the trust divide into separate trusts for each child? If so, the trustees can distribute the IRA in kind to inherited IRAs for each child’s trust, without destroying the stretchout. If the children get their shares outright, then the IRA owner wasted lots of effort since he/she could have named the children as the beneficiaries of the IRA without running it through the trust.
Since we don’t have all the facts, and since it’s hard to make sense out of the facts we have, they should consult with competent tax/estates counsel before doing anything.
If the custodian or the trustees are about to do something that would destroy the stretchout, counsel should point this out to them.