moving money from trust-IRA into bene-IRA’s?
Our parents set up a trust for us, and now (after their death) my sister and I are the successor trustees. Somehow an IRA had this trust named as its beneficiary, and taxes on IRA-distributions from a trust are very high — 10% starting at $1 (with no deductions allowed, I think), then 24% after $2600, and 35% after $9450 — much higher taxes than with the deductions & rates for individuals.
Therefore it would be useful if we can move the money from a “trust IRA” (where I think my parents’ IRA must be placed, because the trust is beneficiary) into two Beneficiary IRA’s for my sister and me. Is this possible? I’ve heard conflicting answers, with “no” by some IRA specialists in phone calls, but seemingly “yes” in a web-page that says…
“As the comparison in tax brackets indicated above show, it’s almost always more income-tax efficient to have inherited IRA distributions taxed to your trust beneficiaries rather than to your trust itself. ….. (this is beginning of 4th paragraph) {in this quoting no words are omitted, but the “…..”s indicate that I’ve rearranged the paragraphs}
“Determining whether your trust or the trust beneficiaries will pay the tax on your inherited IRA distributions will depend on how quickly the trust pays out the money it receives from the inherited IRA. If the inherited IRA funds, like required minimum distributions, go into the trust from the inherited IRA, and then out from the trust to the trust beneficiaries, in the same accounting year, then your trust beneficiaries will pay the taxes on those distributions at their own personal rates. ….. (all of 1st paragraph)
“If on the other hand, your trust does not pay out the money it receives from the inherited IRA within the same tax year, then the inherited IRA distribution will be taxed at trust tax rates. If/when those funds are later distributed to your trust beneficiaries, they will receive the distributions free of income tax. ….. (all of 3rd)
“How that actually happens is a bit complicated and is best left to your tax professional to sort out, but if you’re a “got to know” type of person, here’s the deal. Your trust will record the income from the inherited IRA, but it will get a corresponding deduction, known as a distributable net income (DNI) deduction, that will offset the inherited IRA income. Your trust beneficiaries will then get a k-1 from the trust and pick up the inherited IRA income on their own personal return at their own personal rate.” (all of 2nd)
Obviously I’m hoping it’s “yes, this is possible” but I’m wondering about the phrase describing “the inherited IRA funds, like required minimum distributions” which may differ from “funds” that come from the entire IRA (owned by our mother before her death a few months ago) going into a Trust IRA. So… is it possible to distribute money from a Trust IRA (with no taxing) into Bene-IRA’s that are later taxed when my sister or I each distribute money from our own Bene IRA?
Permalink Submitted by Alan - IRA critic on Sun, 2020-04-12 23:37
It is possible that trust distributions paid to the trust from the IRA can be taxed to the beneficiaries via a K 1 as the article indicated. However, first the trust provisions must be followed by the trustee of the trust. How much discretion does the trustee have? Does the trustee have the authority to terminate the trust and assign the IRA directly to inherited IRAs for each trust beneficiary? If allowed by the trust, is termination of the creditor protection of a trust a good idea, or what was the original intent of leaving the IRA to the trust in the first place? Therefore, these questions must be determined. Other questions – verify that mother passed in 2019, not 2020, and if so, is the trust qualified for look through treatment? What age was mother upon her death? Knowing these answers, then we can concentrate on the mechanics. In the meantime, any distributions from the IRA to the trust should be avoided.
Permalink Submitted by Bruce Steiner on Sat, 2020-04-25 15:41