Estate as IRA Beneficiary-Testamentary trust for children
IRA participant dies with no surviving spouse of participant and multiple children. Estate is named as secondary IRA bene. Participant died before RBD. Trust set up in will for multiple children of participant. Trust sets up distribution dates based on youngest child’s age…1/3 to trust beneficiaries when youngest bene turns 25, then 1/2 of balance at 30, rest at 35. Best way to minimize income taxes on IRA assets? Could higher tax of trust be avoided by distributing inc to help with living and education expenses of the benes during the 5 years?
Permalink Submitted by Alan - IRA critic on Wed, 2019-05-29 18:53
If the testamentary trust was not named on the IRA agreement, it will not be qualified and the 5 year rule will apply to the inherited IRA. As such there are no annual RMDs, but the IRA must be drained by the end of the 5 year period. Trust will retain income and therefore be taxed at trust rates under it’s present terms. It may be expensive and difficult to reform the trust to allow for earlier distributions of income that might be passed through to the trust beneficiaries annually.
Permalink Submitted by Bob on Wed, 2019-05-29 19:07
Thank you for the quick response. I didn’t explain the trust terms as well as I should have. The trust actually allows for distribution of income and/or principal for the health, education, support and maintenance of the children and in the discretion of the trustee. The 25, 30, and 35 distibution dates are when the Trust would have to distribute principal to the beneficiaries.If the trustee distributes the trust income to or for the benefit of the bene to satisfy health, education, support, and maintenace during the 5 years, would the distributions of trust income be taxed to the beneficiaries at their rates rahter than the trust tax rates?
Permalink Submitted by Bob on Wed, 2019-05-29 19:06
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Permalink Submitted by Bruce Steiner on Wed, 2019-05-29 20:27
It’s inconsistent to limit distributions along the way and then mandate distributions at specified ages. But permissible distributions along the way will carry out income.
Permalink Submitted by Bob on Wed, 2019-05-29 20:37
I’m not explaining it well. Sorry about that. The Trustee can use the income and principal for the health, education, support and maintenance of the beneficiaries up until the youngest turns 35. When the youngest turns age 25, the trustee would distribute out 1/3 of the trust assets, 1/2 5 years later, and the rest 5 years after that. I was just wondering if the tax rate would be at the beneficiaries rates if the income and ira assets were distributed out to or for their benefit during the 5 year period. If there are other ways to minimize taxes in this situation, that would be helpful.
Permalink Submitted by Alan - IRA critic on Wed, 2019-05-29 21:25
Yes, it would be taxed to the beneficiary at their personal tax rates, however the distribution of the IRA within 5 years is likely to result in much of the IRA income being accumulated in the trust and that income will be taxed at the higher trust rates.
Permalink Submitted by Bob on Wed, 2019-05-29 21:45
Ok. Thank you. I really appreciate it. Since it’s not a large IRA (about $150,000) and multiple children (3), I think it would work out to distribute it for their living needs and get the lower tax rate too over the 5 years.
Permalink Submitted by Bob on Mon, 2019-06-03 01:00
Charity gets 10% when youngest turns 25. (Child is not 25.) Trustee is directed to transfer right to receive IRD assets to charity to fund charitable gift if trust has right to receive them. If trustee is given authority by trust terms to terminate a share early, could he transfer right to receive ird assets to charity early to help with income tax situation?
Permalink Submitted by Bob on Tue, 2019-06-04 14:41
could charitable bene be removed from trust with a broad discretionary termination provision of a share of the trust?