Trust as IRA Beneficiary

Hello,

In the Oct. Ed Slott’s IRA Advisor, it references a discretionary trust needing to use the shortest life expectancy (the age of the oldest applicable beneficiary). However, in a workshop I attended from Ed’s 2-day back in 2012, per the text contained therein under the section, “No Separate Accounts for Trusts” it included the following: “The only way to possibly create separate accounts for the beneficiaries of the trust when a trust is named as the IRA beneficiary is if the trust itself created separate sub-trusts for each trust beneficiary and the beneficiary form specifies the portion of the IRA that is to be paid to each separate sub-trust (PLR 200537044). The sub-trusts would have to be named as the beneficiaries on the beneficiary form.”

1. I just want to confirm that the above is correct?

2. Assuming so, for the IRA owner who has a revocable living trust, there would be language therein regarding discretionary/accumulation trusts and the IRA Beneficiary Form would also reference the revocable living trust as well as include each sub-trusts as a beneficiary (e.g. 4 sub-trusts for 4 grandchildren as contingent beneficiaries).

3. If one of the grandchildren has special needs (not certain yet if he qualifies for special needs benefits), does his sub-trust need to have certain special needs language therein? Or by virtue of the fact it is a discretionary trust this becomes unnecessary? Also, is it possible for this grandchild’s sub-trust to be discretionary but the other 3 conduits?

Thank you!

Jason



I have many client’s(married) who have their Revocable Living Trust as contingent beneficiary on their IRA accounts and their spouse as primary beneficiary. To keep it simple lets assume a first marriage and no spend thrift provisions on beneficiaries.The estate planning attorney places a section in the Trust powers allowing the trustee to stretch or payout the IRA immediatley. The trustee also has discretion to keep inherited IRA in Trust or look through and have the named beneficiaries own vs. Trust owning. Some attorneys have stated this language should be in document but I have never had a Custodian request. I think it’s more CYA for successor trustee to make their decision without liability.The trust must be Qualified in order to “look through” to the named beneficiaries. Should the trustee elect to look through and each named trust bene elects to retain the Bene IRA the oldest named bene’s DOB is used to determine RMD’s in future years. My B/D as well as American Funds IRA claim paperwork clearly allows the look through and trustee is required to validate the Trust is Qualified. I have heard of the sub trust concept you have referenced but have never utilized. I have heard conflicting info that the sub trust concept allows each sub trust bene’s DOB for RMD calculation unlike the look through concept that requires oldest bene of trust DOB to be used for all I spoke of above. I guess if their is a very large discrepancy in age and IRA is large I could see this as a great tool. I have had client’s create a trust specific to their IRA for a child or grandchild. The Trust stays as owner of Bene IRA and provides language to allow trustee to dertermine payout amount(of course RMD must be satisfied) to income beneficiary or also could have a provision to fund a special needs trust with annual RMD’s. One can have as many Trust’s as wanted. Each Trust can have unique provisions, beneficiaries, etc. instead of jamming into one Trust. I have a seperate Trust for my Primary Reidence, one for my second home, one for my retirement accounts and one for all other assets. I love the simplicity and document can be read by a 8th grader and understand vs. jamming all into a single Trust document. I hope this helps shed some light on your question.   



  • One of the approaches described in the discussion above is the establishment a separate sub-trust for each beneficiary IRA.  The disadvantage of establishing separate sub-trusts for beneficiary IRAs is that separate annual fiduciary tax filings may be required, and that a separate EIN will be needed for each sub-trust.  Unlike a revocable living trust, the separate IRA sub-trusts will be irrevocable, and may therefore require separate tax filings.  Each year the federal and state filing requirements will need to be assessed, and fiduciary tax returns filed if required.  Filing will likely be required even if no fiduciary tax is due since the IRA custodian will issue form 1099-R each year and the trust will issue schedule K-1 to rhe beneficiary.  The filing of a number of fiduciary returns (Federal form 1041 and various state forms) will also entail ongoing accounting expense.  
  • If the beneficiaries live in different states, the filing requirements may differ, according to the fiducuary requirements of each state.  
  • If the trustee resides in certain Western states, fiduciary return filing may be required in the state of the trustee even if the deceased grantor and beneficiaries reside in other states.
  • Therefore the establishment of separate sub-trusts intoduces a level of complexity that should be carefully considered in advance to determine if the benefit balances the cost and complexity.


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