Trust IRA as beneficiary
I have a Trust that was the beneficiary of an IRA, $450K. There are two adult children and two grandchildren that are 40%, 40%, 10%, 10% bene’s of the trust.
Since the IRA is being retitled into the Trust IRA, I know we can create four Trust IRA accounts going forward with a required distribution based on the oldest beneficiary.
1. Since each Trust IRA is in the Trust TIN number, does the trustee need to complete a Trust return each year?
2. The trust received a 1099 for each account’s required distribution each year. Is this income passed to each beneficiary and taxed at their rate vs. taxed at the trust return “small” brackets?
3. They are debating paying the tax on the whole thing and moving to non-qualified accounts… so the trustee wouldn’t have to be responsible for all the accounts. Again, would the tax be passed to each person based on the 40,40,10,10 split or taxed at trust rates?
Permalink Submitted by Alan Spross on Wed, 2012-02-22 20:24
Taxation depends on the provisions of the trust. Some trusts are drawn to accumulate the funds and some may even be conduit trusts where all income must be passed through. Trustees may have discretion in other trusts.
If income is accumulated in the trust, the compressed trust tax rates will apply. Income passed through to beneficiaries trigger a K1 where each beneficiary reports the income on their own 1040. The trust will have to file a 1041 each year in either case because of the amount of income being reported on the 1099R from the IRA. There should be a 1041 for each TIN, but not sure if your trusts should have the same TIN or not.
Permalink Submitted by John Lugauer on Wed, 2012-02-22 20:29
Alan,
Thanks for the initial reply. Pershing as Custodian does make each Trust be in the Trust TIN. I will review with the attorney the trust provisions, but it sounds like they can pass “conduit” income. So the only additional cost would be the trust return each year and issuing the K1’s? Besides the single trustee controlling all four accounts.
Permalink Submitted by Alan Spross on Wed, 2012-02-22 21:03
Yes, the trust return would be an additional cost in comparison with an IRA that had been left outright. However, perhaps the trust would have existed anyway and will hold other assets than the IRA.
There is also accelerated taxes for all the beneficiaries that are younger than the oldest trust beneficiary. Hopefully the trust contains provisions to address the death of any beneficiary with respect to that person’s beneficiary interest passing to successor beneficiaries.
Permalink Submitted by Bruce Steiner on Wed, 2012-02-22 23:44
A conduit trust rarely makes sense. If the beneficiary lives to life expectancy, nothing will be left in the trust. It’s usually better to give the trustees discretion over distributions. See my article on this subject in the March 2004 issue of the Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf