Trust as IRA Beneficiary
An individual names her trust as the beneficiary of her IRA. She is NOT married and has NO kids. Her trust has 5 individual beneficiaries. Individual has recently passed away and her trustee is looking to simply cash out the IRA and distribute to the beneficiaries of the trust. In doing so, are the income taxes due passed through to the trust beneficiaries OR are they taxed to the trust itself? How does this income get reported to the trust beneficiaries (via a K-1)? Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2014-03-04 00:39
The trustee must adhere to the terms of the trust, although the trustee may be accorded considerable discretion. In most cases where the beneficiaries are just friends of the decedent, you would expect that the trust income would be passed through on a K1 and taxed on the beneficiary returns. If the IRA is distributed the alternative would be for the trust to pay the taxes at the higher trust rates. But the best solution might have been to assign the IRA directly to the trust beneficiaries where they could avoid the tax rates on a lump sum distribution of the IRA. The trust may or may not be qualified for look through treatment, but most are qualified. The separate account rules for RMD purposes do not apply to trust beneficiaries.
Permalink Submitted by Mike Hoye on Tue, 2014-03-04 01:56
Thanks for the reponse. Just to clarify…In this situation, the trustee simply plans to have the current IRA (100%) paid out to the trust as the primary beneficiary. (I understand this is not the best option im many cases) so she can pay the 5 beneficiaries their share. Because 100% of the IRA will be paid out who will pay the tax? Will the trust have to pay trust tax rates BEFORE the money is given to the beneficiairies. OR, can the trustee pay the beneficiaries outright and have this reported to them via K-1.
Permalink Submitted by Bruce Steiner on Tue, 2014-03-04 16:10
Why would the IRA owner create a trust that pays out upon her death and leave her IRA to that trust? She could have simply named the five individuals as the beneficiaries of her IRA, or, if she wanted to keep it out of their estates and protected it against their creditors and spouses. she could have named trusts for their benefit as the beneficiaries.
Permalink Submitted by mk foss on Tue, 2014-03-04 23:21
If the trustee makes distributions to the IRA beneficiaries before the trust year-end, the beneficiaries will be liable for the IRA tax. It’s a little more complicatd than that but basically any distributions of income to trust beneficiaries pushes the tax burden to those individuals. They will each get a Schedule K-1 that will explain where to report the income of Form 1040.