Trust distrib when Trust is IRA Bene
Decedent made his Trust the Beneficiary of his IRA. His wife is the income beneficiary during her life and trust states that the income is to be distributed to wife.
The RMD for the year from the IRA is $10k, and that amount is distributed from the IRA to the trust’s brokerage account. The trust also has $7k of dividends and interest income.
Therefore, the fiduciary income is $7k and the taxable income is $17k. Per the trust agreement, the income ($7k) must be distributed to the wife. Because the trust received the $10k of RMD, and since this is a see through trust, is the RMD required to be distributed to the wife (per the IRS) as well?
I understand that if the trust doesn’t distribute the $10k, then it is taxed on the income, but we are trying to determine if it Must be distributed.
Thank you in advance.
Permalink Submitted by Bruce Steiner on Fri, 2013-03-01 18:40
What does the trust say?
Permalink Submitted by mk foss on Sat, 2013-03-02 20:32
As Bruce indicated, the trust agreement should define trust income. If not, you need to determine how your state principal and income act defines income. The RMD is partially income and partially principal in all states that I’m aware of. Failure to distribute all income could be worse than paying a high income tax rate on the income retained in the trust. The attorney who they worked with to create the trust should be able to assist.
Permalink Submitted by nick resurreccion on Fri, 2013-03-22 18:43
I guess I was seeking clarity on the RMD vs required trust distrbutions. RMD is determined by the IRS rules and must be distributed from the IRA to the trust. My understanding is that the trust, on the otherhand, does not necessarily have to` distribute the RMD per se to the bene and the Trust’s distribution is dertermined based on the trust agreement and not the RMD (the broker was telling me that because this is an RMD, it must be distrib to the bene per the IRS). the trust agreement says to distribute all fiduciary net income. The trust document says the trustee can allocate receipts and disbursements for the Trust between income and principal as the Trustee in its discretion may determine. Can we then consider the RMD receipt to be 90% income and 10% principal? If so, we can then distribute 90% to the bene and have the bene pay the lower tax rate. Is there a limit to how much of the RMD we can say is income–can it be 100% income?Thanks.
Permalink Submitted by mk foss on Sat, 2013-03-23 18:37
The trust agreement can define the RMD as 100% principal or as 100% income. It sounds like your trust agreement gives you the flexibility to do either. There is ordinarily no problem when the RMD is treated as mostly income as far as IRS is concerned. Especially if this is a QTIP trust, IRS wants it to be mostlly income. Difficulties can arise when the trustee distributes all of the RMD when the trust agreement or state law (if the agreement is silent) treats part or all of the RMD as princiapal – the difficulty there is with the other beneficiaries not with IRS.Your’re correct that anything that’s not allocated to income and distributed will be taxed to the trust.
Permalink Submitted by Bruce Steiner on Sat, 2013-03-23 23:55
Why is the broker giving legal advice?What do you mean by “his trust”? The IRA owner is dead, so he can’t be a beneficiary of the trust.If the trust is intended to qualify for the marital deduction, then the wife must be entitled to all of the income of the trust (determined in an appropriate, non-arbitrary manner). In other words, if 90% of the required distribution is principal, then the trust won’t qualify for the marital deduction, since that’s not a reasonable allocation between income and principal. If the trust is intended to qualify for the marital deduction, many states have provisions in their principal and income laws providing an exception from the rule in the uniform principal and income act that would treat 90% of the required distribution as principal, and if not, then the trust should contain an exception.If the trust is well drafted, or even averagely drafted, the trustees should be able to distribute as much of the principal as they want to the wife.Note that this plan destroyed the wife’s ability to roll the IRA over, name new beneficiaries, and possibly convert to a Roth. Was there some reason for this, such as a second marriage, or the wife being a spendthrift?Depending on the facts, the income could be more or less than the required distribution. If the income is more than the required distribution, the trustees can withdraw the income and distribute it to the wife. The wife may be able to roll over the amount in excess of the income.If the income is less than the required distribution, then the portion of the required distribution that’s in excess of the income will be principal. If the trust so permits, the trustees can distribute this portion of the required distribution to the wife as well.It would be helpful if you would tell us whether this trust was intended to qualify for the marital deduction, and exactly what the relevant portion of the trust says.You may also wish to ask these legal questions of the attorney who handled the IRA owner’s estate, or the attorney who handles the wife’s estate planning.
Permalink Submitted by nick resurreccion on Mon, 2013-03-25 16:04
I have read the 90-page trust document and I was making sure that I correctly understand the RMD and tax aspect. All is now clear, Thank you for your help!Nick
Permalink Submitted by Bruce Steiner on Mon, 2013-03-25 20:44
Why would it be 90 pages? Did they buy it from a trust mill?