IRA in trust-steps for a beneficiary

Submitted by John Foster on Wed, 2020-01-29 23:43

I have a 53 year old client who is beneficiary of a trust that is beneficiary of an IRA, and a 403b.
Her 55 year old sister is an equal beneficiary.

What are the steps that will be needed to take to end up with each having an inherited IRA for 50% of the total retirement plan assets?

Thank you,

Scott



Submitted by Alan - IRA critic on Thu, 2020-01-30 03:06

First, the trust provisions must either provide for termination, distribution of the inherited IRA out of the trust, or for the trustee of the trust to have discretion to make this decision. If allowed, the trustee can then provide instructions to the IRA custodian to assign the IRA to the trust beneficiaries as equal inherited IRA accounts. The IRA is then split and each trust beneficiary will have their own inherited IRA.  However, this does not change the RMD required for each inherited IRA. If the trust was qualified for look through, the age of the oldest trust beneficiary would be used for both inherited IRA RMDs for owner deaths prior to 2020. For owner deaths after 2019, the 10 year rule would apply.



Submitted by John Foster on Mon, 2020-02-03 18:53

How is the 403b handled? Does the trust set up sub trusts as inherited IRAs FBO the beneficiaries of the trust and then receive the 403B proceeds into each trust. I would think it would be 100% taxable distribution if the 403b just pays the proceeds directly to the trust. Am I correct? 



Submitted by Alan - IRA critic on Mon, 2020-02-03 22:38

  • Yes, distribution of any retirement plan or 403b to a beneficiary including a trust beneficiary is a taxable event.
  • To avoid this a direct rollover to an inherited IRA in the name of the trust from the 403b should be done per Sec 402(c)(11). The 403b is required to comply with such a request if the trust is qualified for look through treatment since that allows the trust beneficiaries to be treated as designated beneficiaries. Once this is done, the trustee of the trust (if the trust permits) can assign the inherited IRA to separate inherited IRAs for each trust beneficiary.  The age of the oldest trust beneficiary must still be used by each beneficiary for RMDs.  There is no need for sub trusts.


Submitted by John Foster on Tue, 2020-02-04 00:32

I looked up Sec 402(c)(11). Do I understand correctly from the Sec and your comments that the qualified trust should first establish with a custodian an inherited IRA in the name of the trust. (it can’t just take a check and commingle with other trust assets) Then the 403b can do a direct rollover. Then (if the trust permits) assign the inherited IRA to separate IRAs for each trust bene? I feel like we’re transfering an egg with a fragile shell that will make a mess if we’re not super careful.



Submitted by Alan - IRA critic on Tue, 2020-02-04 01:37

Yes, the inherited IRA in the name of the trust should be set up and then a direct rollover of the inherited 403b into that inherited IRA. Make sure that no distribution is requested from the 403b since that would be irrevocably taxable. The inherited IRA can be assigned later to the trust beneficiaries if the trust is allowed to either terminate or distribute the assets out of the trust. 



Submitted by John Foster on Fri, 2020-02-07 19:54

Re:the inherited IRA can be assigned later to the trust beneficiaries if the trust is allowed to either terminate or distribute the assets out of the trust. Does the trust have to have language specific to an inherited IRA or just general language that allows the trust to terminate or distribute assets (of any type) out of the trust?  For example, if the trust states something to the effect of—“As each beneficiary reaches the age of 21 or has already attained the age of 21, the trust shall distribute to that beneficiary 100% of that beneficiary’s share of the estate.” 



Submitted by Alan - IRA critic on Fri, 2020-02-07 23:55

That wording is sufficient to not only allow assignment, it requires it. General language is sufficient as long as it is clear.



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