IRA through probate to trust | Ed Slott and Company, LLC

IRA through probate to trust

IRA owner died 01/2017, post RMD. Owner did not list beneficiaries. His estate was probated. Will was a pour over will to trust. IRA is arguably a trust asset. Trust beneficiaries are two adult daughters. Trust does contain language on Retirement accounts, but it doesn’t indicate that account should be disbursed over oldest beneficiary’s lifetime.

What is the most tax deficient way to distribute IRA?

Am I correct in assuming to stretch out and no inherited Ira are viable options for the reason that the account is a trust asset and not payable on death to the trust?

I plan on telling beneficiaries that we should liquidate account and divide 50/50. They will incur a tax hit. IRA is approx. $260,000.

Since he did not name the trust directly on the IRA agreement as beneficiary, the trust is treated as a non individual beneficiary. The IRA must be distributed using the remaining life expectancy of the decedent. RMDs will be paid to the trust, and if the trust permits the trustee could assign the inherited IRA to the trust beneficiaries, but that would not change the RMD calculation. Of course, a lump sum distribution of 130k to each trust beneficiary would result in both loss of tax deferral and a higher marginal tax rate for the beneficiary for the year of distribution. 

Thanks for the quick response. So, if I’m understanding correctly... let’s say deceased owner‘s remaining life expectancy is ten years. The RMDs will pay out to the trust for the next ten years because we are using owners life expectancy, not trust beneficiary’s. The trustee will then receive the payment and subsequently disburse to the trust beneficiaries. there would be no reason to use the beneficiary‘s age or life expectancy. No stretch out, no inherited Ira. Just treat the account as if owner was still alive...  can you you explain what you mean by assigning the Ira to the beneficiaries? The beneficiaries don’t get along. I’m wondering if this would be helpful.

If the client had listed his Estate as beneficiary of IRA would it have changed the outcome of life expectancy used.? Some attorneys use a Testamentary Trust contained in Will, seems this type of planning is terrible for stretch IRA planning for beneficiaries who are much younger than descendant!!! Concept of attorneys who still use Testamentary Trust route is public record for all bene’s to see but appears large downfall is lost stretch opportunity using oldest beneficiary life expectancy if younger than descendant .

  • Testamentary trusts work fine.  Unless you're a celebrity no one will be going to the courthouse to look at your Will, nor will the media be interested in it.  If you're a celebrity you'll probably want the publicity.
  • Unless you charge by the document, why create additional instruments when you can put the trusts that receive the IRA benefits in the Will?
  • The stretch is the same regardless of whether the trusts that receive the IRA benefits are in the Will or in a separate trust instrument.
  • Leaving an IRA to an estate is poor both for the stretch and because it exposes the IRA to the IRA owner's creditors.

  • If the terms of the trust allow it to be terminated and the trustee considers termination to be beneficial, the trustee can assign the inherited IRA to the beneficiaries of the trust. Since they would each have their own inherited IRA, there is no need for coordination between them. Again, the trust provisions determine whether the trustee has the authority to assign the inherited IRA, but that would also terminate any creditor protection offered by continuing the trust.  If the remaining life expectancy of the decedent is 10 years, that is still a stretch but probably not as long a stretch as the oldest trust beneficiary would otherwise have. 
  • If the estate had been named as beneficiary, the RMD calculation would be the same, and so would the assignment process. Or if the decedent had named "testamentary trust created in my will" as the beneficiary instead of not listing it, the trust might have been qualified for see through treatment and the RMDs would then have been calculated using the age of the oldest trust beneficiary. Therefore, the main problem here is failing to list the trust (testamentary or not) in the IRA beneficiary clause, rather than having the trust inherit. A trust qualified for see through is still very effective in providing a stretch as long as the oldest trust beneficiary is not much older than the average age of other beneficiaries.

I've got a continuation question - there are 2 beneficiaries under the trust, 50% each.  Can 1 beneficiary elect to keep the RMDs and can the other request a lump sum payment?  I imagine we would cut a check to beneficiary #1 for the 50% of the FMV of the account.  For beneficiary #2, there would be annual RMD payments based on dad's lifetime?Other question - if RMDs are payable to the trust/trustee then pays them to the beneficiaries...who pays the tax?  Does the trust bear the tax consequence because it is in receipt of the RMDs? Would it be paid at a trust tax rate?  Would the beneficiaries pay the tax at their personal tax rate? Both?

All of these questions are subject to the terms of the trust. Some trusts are drafted to accumulate income which is taxed at the higher trust rates, and some are conduit trusts that are required to pass all distributions through to the beneficiaries, who then pay the taxes at their individual tax rates. Some trusts are not specific and provide the trustee with discretion to do what they consider best. Any distributions made from the inherited IRA are taxable, so even if paid at the lower individual rates larger distributions such as a lump sum will increase those individual rates in most cases. FInally, each beneficiary does not gain complete control of their share until their share of the inherited IRA is assigned to them individually by the trustee of the trust. 

  • Most well-drafted instruments give the trustees discretion as to distributions.  That allows the trustees to decide each year, considering income taxes and whatever other factors they deem relevant, how much to distribute.
  • Bruce Steiner

  • Check the IRA agreement to see whether the default is (i) the estate, (ii) the spouse, if any, otherwise the estate, or (iii) the spouse, if any, otherwise the issue, or if none then the estate.
  • Bruce Steiner

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