Trust is beneficiary of IRA for Spouse

Submitted by Shawn Freeman on Thu, 2015-11-05 13:48

I have a client who recently passed away. While living he let a trust mill come in and convince him he needed to put everything into his trust which included naming the trust as beneficiary of his IRA’s. Its a simple Family Trust that does not have any provisions of how his surviving spouse takes distributions from the accounts. After speaking with several others I am just as confused now as I was in the beginning.

My questions are
1) How can we avoid paying taxes on the full amount now?
2) Ive heard some custodians allow the trust to be bypassed if the beneficiary of the trust is the spouse and will allow her to rollover the proceeds in her name?
3) More questions will follow I’m sure.

Thank you



Submitted by Ben Meyer on Fri, 2015-11-06 14:06

  • Several variables here will govern your course of action.  Two questions need to be resolved first:  a) Did the client pass away prior to the RBD (Required beginning Date: April 1 of the year following the year that the decedent became age 70.5), and b)  Does the trust qualify as a “qualified trust”?  Four requirements must be fulfilled for a trust to be a qualified trust:  

    1) The trust is a valid trust under state law;
    2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the IRA owner;
    3) The beneficiaries of the trust are identifiable (this can become a complex consideration); and
    4) A copy of the trust documents, or the applicable portions, are provided to the IRA custodian by October 31 of the year immediately following the year in which the IRA owner died.

  • Another consideration is whether the surviving spouse is the sole beneficiary.
  • Also, does the trust provide for a credit shelter trust to be established for the benefit of the surviving spouse, to secure either federal or state estate tax credits.  You say that the trust is a “simple” trust, which implies that tax planning measures such as a credit shelter trust are not included.  
  • The requirements of state law are also relevant, for the state where the decedent was domiciled.
  • In any case, one goal should be to distribute any IRA distributions to the trust in the year received (“currently”).  This will allow the distributions to be taxed to the recipient instead of the trust.  If the distributions are accumulated in the trust, the tax will be at the fiduciary tax rates, which are much higher than the individual rates.  The fiduciary tax rates reach the maximum at trust income levels of around $12,000 in any tax year.
  • It may also be possible to utilize a section 645 election, which will allow some flexibility in selecting a more optimal tax year for trust taxation.
  • But beware of potential ignorance of the rules by the IRA custodian.  If the custodian is not well informed regarding the interaction of all these rules, the custodian may perform some unilateral action you wouldn’t want, or may refuse to take an action that may be fully proper.
  • If the spouse is the sole beneficiary, and if a credit shelter trust is not involved, you should be able to elect one of the usual three options available to a surviving spouse.
  • The terms of the IRA custodial agreement will also establish, or limit, your options.  You should be able to transfer the IRA to a new IRA custodian if the options available are not satisfactory
  • Also see the following articles:   
    http://www.kitces.com/blog/qualifying-a-see-through-trust-as-an-ira-designated-beneficiary-conduit-or-accumulation/

    “Designating A Trust As Retirement Beneficiary”,   http://www.investopedia.com/articles/retirement/04/081804.asp



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