Trust as IRA Beneficiary
If someone names their Revocable Living Trust as IRA Beneficiary (not preferred, I know) and it is the standard RLT that names the surviving spouse as income beneficiary and the kids as remainder beneficiary, will the kids have to use the age of the oldest beneficiary (the surviving spouse) to determine their RMD from the IRA? If the IRA is left to the spouse first, then to the RLT, there is NO spouse left so wouldn’t the kids be able to use the age of the oldest sibling?
Permalink Submitted by Alan Spross on Fri, 2012-10-12 22:10
Yes and Yes.
Permalink Submitted by Mike Hoye on Fri, 2012-10-12 22:31
So…in Ed Slott’s book, he mentioned that “if you are looking to set up your IRA to be stretched over the life expectancy of your children or grandchildren, and you are certain you need a trust for them, then you should NOT use the typical estate planning trust that names the trust as income beneficiary.” He suggests setting up a seperate trust (conduit) for the IRA. [u]My point is[/u]…in MOST situations, a husband will name his wife as primary beneficiary on his IRA and then perhaps name the RLT as contingent beneficiary. Husband dies, IRA goes to wife. She then names the RLT as the primary beneficiary. Wife dies and kids want to stretch the IRA over their life expectancy. Now that the wife/mom is “out of the picture”, you’re saying that the wife/mom’s life expectancy is NOT used any longer (even though they are using the same original RLT that listed her as an income beneficiary). If this is the case (and this is the intended flow of the IRA), there wouldn’t seem to be the need to set up a separate conduit trust for the IRA. Is my understanding of this correct?
Also, since most RLT’s have been written with spouse as income beneficary and kids as remainder, can you point me to the regulation that indicates the life expectancy of the spouse/income beneficary WILL BE USED in determing the the RMD payout?
Permalink Submitted by mk foss on Sat, 2012-10-13 21:17
The contingent beneficiary is disregarded if the primary beneficiary is alive at the death of the IRA owner.
So if spouse is primary beneficiary and RLT is contingent and spouse is alive when IRA owner passes away. Spouse becomes beneficiary and can roll over the benefits. After a rollover if she names RLT, the oldest trust beneficiary’s life will be used for later distributions.
If spouse predeceases or disclaims the IRA at the owner’s death, the RLT is the promary beneficiary. If she disclaims, she is the oldest trust beneficiary and RMDs will be based on her life expectancy – when she passes away, RMDs continue based on her remaiing life expectancy. If she predeceases, the oldest beneficiary of the RLT will determine the span of years for RMDs.
If the RLT is the primary beneficary, the spouse will get income for her life and there is no change in the RMD schedule once she passes away. You can only change the life expectancy schedule when the beneficiary changes – like a death after a rollover by the spouse. The mere change in the identity of a trust’s beneficiaries doesn’t allow a change in the RMD method.
Permalink Submitted by Bruce Steiner on Sun, 2012-10-14 12:21
Revocable trusts are overhyped and oversold, and do not save taxes. While they make sense in some cases, for most people they’re not necessary. The foregoing may not apply in all states — they’re common in California, for example, for reasons specific to California.
Even if you have a revocable trust, running an IRA through a revocable trust can cause lots of problems, without providing much benefit. In this example, the surviving spouse could simply leave the IRA to the children. Or, if the amount involved is sufficient to warrant administering trusts for the children (which would keep the IRA benefits out of the children’s estates for estate tax purposes, and would protect against the children’s potential creditors, including spouses), the surviving spouse could leave each child’s share of the IRA to a trust for his/her benefit.
Conduit trusts (where the trustees have to pay out all amounts received from the IRA to the beneficiary of the trust) rarely if ever make any 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 IRA benefits will have been thrown into the beneficiary’s estate, and will be subject to the beneficiary’s creditors. We almost always make the trusts fully discretionary. In that case, however, you have to make sure that none of the accumulated IRA benefits can ever go to anyone older than the beneficiary whose life expectancy you’re using to measure the required distributions (generally the oldest child), or to a charity.
For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .