Roth IRA Trust as beneficiary of a Roth IRA
Presently my Roth IRA is held in a custodial account.
A Roth IRA Trust has been prepared wherein the “pass-through” beneficiary of this conduit Trust will be my grandchild. Should the beneficiary form for the custodial account read:
“100% to the (my name) Revocable Roth IRA Trust for the benefit of (grandchild’s name), dated dd/mo/year”,
or should the beneficiary form read:
“100% to the [u]Trustee of the [/u](my name) Revocable Roth IRA Trust for the benefit of (grandchild’s name), dated dd/mo/year”?
Permalink Submitted by Alan Spross on Mon, 2012-01-16 23:38
Unless state law indicates otherwise, showing “trustee of” is redundant but should not cause a problem. The important element is to have the name of the trust identical to the name as shown as the IRA beneficiary. Since the trust conditions govern the benefit, showing the name of the grandchild is also redundant in the IRA title, but of course not in the trust itself if you want the benefits limited to one specific grandchild.
A conduit trust will provide assurance that the grandchild’s life expectancy will apply to the RMDs, but it does not limit IRA distributions to the RMD UNLESS so indicated in the trust. There are also other concerns about conduit trusts with respect to creditor protection. Is the conduit trust created in the RLT at your death?
Your reference to “Roth IRA Trust” also raises the question if this is a “trusteed IRA”, ie IRA agreement and trust in a consolidated contract?
Permalink Submitted by John Peoples on Tue, 2012-01-17 01:03
Upon parsing your response, I have some other questions/comments.
1. [i]”Unless state law indicates otherwise, showing ‘trustee of’ is redundant …”[/i]: Does that mean that some states, in fact, require reciting “trustee of” on the beneficiary form? If so, how do I find out if my state (NJ) requires the recitation?
2. [i]”Is this conduit trust created in the RLT at your death?”[/i]. The Roth IRA Trust is a separate, stand-alone trust which now exists but which is unfunded until my death. It will be funded only by assets in the Custodial Roth IRA account. I also have a separate, stand-along Revocable Living Trust which handles all other assets other than the Custodial Roth IRA. The Roth IRA Trust limits distributions to the RMD, except the Trustee, in its discretion, can distribute funds for education and health.
3. [i]”Your reference to ‘Roth IRA Trust’ also raises the question if this is a ‘trusteed IRA’ …”[/i]: No, it is not an IRA agreement and trust in a consolidateed contract. Sorry if my question was confusing. In fact, I am even unsure as to why my language raised a “red flag”. Any comments would be helpful.
I have been researching the issue of the Trustee being able to take funds from the Trust to meet Trustee expenses once the Roth IRA Trust is funded. I will post my questions separately on the Board since others may have an interest in the questions and/or can provide responses.
Permalink Submitted by Alan Spross on Tue, 2012-01-17 03:33
[quote=”[email protected]“]Upon parsing your response, I have some other questions/comments.
1. [i]”Unless state law indicates otherwise, showing ‘trustee of’ is redundant …”[/i]: Does that mean that some states, in fact, require reciting “trustee of” on the beneficiary form? If so, how do I find out if my state (NJ) requires the recitation?
I don’t know of any, but it is a question that the attorney who drafted the trust would know in your state.
2. [i]”Is this conduit trust created in the RLT at your death?”[/i]. The Roth IRA Trust is a separate, stand-alone trust which now exists but which is unfunded until my death. It will be funded only by assets in the Custodial Roth IRA account. I also have a separate, stand-along Revocable Living Trust which handles all other assets other than the Custodial Roth IRA. The Roth IRA Trust limits distributions to the RMD, except the Trustee, in its discretion, can distribute funds for education and health.
OK, good.
3. [i]”Your reference to ‘Roth IRA Trust’ also raises the question if this is a ‘trusteed IRA’ …”[/i]: No, it is not an IRA agreement and trust in a consolidateed contract. Sorry if my question was confusing. In fact, I am even unsure as to why my language raised a “red flag”. Any comments would be helpful.
Trusteed IRAs have some different issues than independent trusts that will only receive IRA assets. Usually they are simply referred to as such, but was not sure that was not what you meant by “Roth IRA trust”,
I have been researching the issue of the Trustee being able to take funds from the Trust to meet Trustee expenses once the Roth IRA Trust is funded. I will post my questions separately on the Board since others may have an interest in the questions and/or can provide responses.[/quote]
Permalink Submitted by Bruce Steiner on Tue, 2012-01-17 04:02
1. Your lawyer should give you the language he/she prefers.
2. A trust is not an entity like a corporation, partnership or LLC. Rather, a trustee holds assets in his/her capacity as trustee, like a guardian, custodian or receiver.
3. It doesn’t matter whether the trust that is the beneficiary of the IRA benefits is in the same document as the Will, or in a separate trust agreement. We’ve generally found it to be simpler (and less expensive for the client) to create the trust for the IRA benefits in the Will. Of course, in either case, the IRA benefits should be held in a separate trust, since (i) there are special rules governing trusts that are the beneficiaries of IRA benefits, and you wouldn’t want to subject the other assets to those rules (unless the value of the non-IRA assets is very small), and (ii) you want to be able to allocate GST exemption to one trust separately from the other.
4. Conduit trusts rarely if ever make any sense. I’ve only had one case where a conduit trust arguably made sense. If the beneficiary lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust. All of the assets, which would have been kept out of the beneficiary’s estate and protected against the beneficiary’s creditors, including spouses, will be thrown into the beneficiary’s estate, and exposed to the beneficiary’s creditors, including spouses. Is there some particular reason for creating a conduit trust in this case?
5. Revocable trusts are very unusual in New Jersey. Unlike some states, notably California, where probating a Will may be difficult or expensive, probating a Will in New Jersey is very simple, and very inexpensive. The court clerks will even fill out the forms for you. Unlike some states, in New Jersey, once the Will is probated, you won’t have anything to do with the court (other than filing a form that says you sent a notice of probate to the interested parties) unless there’s a dispute. Indeed, several lawyers in New Jersey have been disciplined by the New Jersey Supreme Court for pushing revocable trusts. You can find the details by doing a Google search for “New Jersey attorney discipline” (without the quote marks). At or near the top of the search results will be a document containing the attorney discipline cases. You can then searching for “living trust” (without the quote marks) within the document. While there are occasional cases, even in New Jersey, where a revocable trust may make sense, they are few and far between. Is there any special reason for creating a revocable trust in this case?
Permalink Submitted by John Peoples on Tue, 2012-01-17 19:13
Follow-up comments/questions to the response by bsteiner:
1. My concern is: what is “legally correct” in NJ versus what is “preferred”.
2. To me, a Trust and Trustee are different entities/parties: the Trust holds the assets, and the Trustee manages the assets in accordance with the instrument that names the Trustee – my understanding is that the Trustee does not hold the assets per se.
3. Your point about GST exemption is on-point for my situation.
4. It would be helpful to learn about the one case where a conduit trust made sense. I was advised that, since I wish to ensure the RMD (but only the RMD except for education and health) is paid to the beneficiary each year, the conduit trust is the appropriate vehicle. An accumulation trust leaves the decision up to the Trustee; and “toggling” between the two can only happen once.
I am confused by the two sentences that start with: “If the beneficiary lives to life expectancy …”. Yes, I concur nothing will be left in the trust. Then you say “All of the assets, which would be kept out of the beneficiary’s estate and protected …”; this does not follow from the previous sentence. Do you mean that if the beneficiary does NOT live to life expectancy, then “All of the assets, which would be kept out of the beneficiary’s estate and protected …”. It is my further understanding that if the Trust holds assets upon the beneficiary’s death, the Trust assets will be part of the beneficiary’s taxable estate that may require the payment of estate taxes, but if the Trust terms state that the beneficiary’s issue becomes the successor beneficiary, the Trust (assets) will not be subject to the beneficiary’s creditors, spouses, etc. Please enlighten me.
5. The reason for creating the revocable living trust is that I own property in other states, including Florida, where probate is a nightmare and costly besides.
Permalink Submitted by Bruce Steiner on Tue, 2012-01-17 19:48
The one case where the conduit trust arguably made sense was someone who wanted his wife to get as much as she needed (but no less than the greater of the income or the required distributions, so it would qualify for the marital deduction), but no more, so that whatever she didn’t need during her lifetime would go to his favorite charity at his death. With a conduit QTIP trust, the required distributions are less each year, since you get to recalculate her life expectancy each year since she’s treated as the sole beneficiary. But this is the only case I’ve had in the 20+ years since the proposed regulations allowed trusts as beneficiaries of IRAs that a conduit trust arguably made sense.
In a conduit trust, if the beneficiary dies before life expectancy, which will happen 50% of the time, there will still be some assets remaining at the beneficiary’s death. The assets remaining in the trust will not be included in the beneficiary’s estate, and will be protected against the beneficiary’s creditors, including spouses.
You can draft the trust so that whatever is left in trust will, or will not be, included in the beneficiary’s estate. I had assumed you would make it so it would not be, but you could do it the other way.
What you heard about Florida is incorrect. Probating a Will in Florida is generally not particularly difficult, expensive or burdensome. I’m admitted in Florida (as well as New York and New Jersey), and we probate lots of Wills in Florida by mail from our office in New York. The cost of probating a Will in Florida and doing the related paperwork is about the same as the cost of doing a revocable trust and transferring one’s real estate to it.
For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf