Regular and Roth IRA being left to Trust
I am trying to leave a stream of income to my Grandson by leaving him a taxable IRA and a ROTH IRA. He is the only beneficiary of the trust. The trust will be required to pay him monthly distributions for 10 years from the taxable IRA with any remainder being distributed in year 10 thus zeroing out the IRA within the required time frame. The IRA will also distribute sufficient funds to pay any trust expenses. The intent is that the trust have zero income. Will this work??? At the end of the 10 years the trust will close out the ROTH IRA (not taxable for federal income taxes) and hold the funds to continue the payment stream until all of the assets have been distributed. During this timeframe only the income earned by the trust will be taxable and passed on to the beneficiary along with sufficient principle to continuie the payments. Again will this work to keep trust income zero with all taxable income being passed on to the beneficiary. The guest expert this month does not really touch on this example and the references made to purchase her book of chapters 6 and 7 have not been updated for the new rules and list RMD’s many times which do not exist any more. Thank anyone for comments
Permalink Submitted by Alan - IRA critic on Mon, 2020-08-03 17:23
It should work as long as the trust is qualified for look through. If it were not (for example trust info not being provided to the IRA custodians by 10/31 of year following year of your death), then the RMDs would be based on a non DB beneficiary and Roth would be subject to the 5 year rule, TIRA also if you passed prior to your RBD. With qualification for look through, the 10 year rule applies to both, and trust would pass through all income on a K1 to the beneficiary, who would report the income. There could be kiddie tax implications to the taxable income to the parent depending on when gs inherits, and of course the trust will have to file a 1041 but will not have to pay any tax due to pass through. Of course, the arrangement is limited in the area of creditor protection since the IRA assets will be passed through in a limited number of years.
Permalink Submitted by Bruce Steiner on Tue, 2020-08-04 15:32
It works, but it’s generally better to have trusts be discretionary so the trustees may decide each year how much to distribute and how much to retain, based on the situtation from time to time.