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RMDs to a Trust Beneficiary of an IRA

By Beverly DeVeny
Director of Retirement Education
Follow Us on Twitter: @theslottreport
 

In the past couple of weeks, I have heard the wrong answer to the question of where required minimum distributions (RMDs) must go to a trust beneficiary from both an advisor and an IRA custodian.

The advisor was dealing with a special needs trust as the beneficiary of the IRA. He thought that since a trust was the beneficiary the only distribution option was a 5-year payout. The trust was one of the best written trusts I had seen. It met all of the requirements for a payout based on the age of the oldest of the trust’s beneficiaries.

An attorney was dealing with a trust that also met all the requirements for a payout based on the age of the oldest of the trust’s beneficiaries, but was being told by the IRA custodian that RMDs must be based on the remaining life expectancy of the IRA owner.

So, what are the rules? If a trust qualifies, RMDs can be made from an inherited IRA to the trust based on the age of the oldest applicable trust beneficiary. When a trust is not qualified, RMDs will be made 1) using the age of the deceased IRA owner when the owner dies after his required beginning date (RBD), 2) using the 5-year payout when the owner dies before his RBD. The RBD is April 1 of the year after the IRA owner reaches age 70 ½.

A trust qualifies if it meets the following four conditions:

1. The trust is valid under state law.

2. The trust is irrevocable or becomes irrevocable at the death of the IRA owner.

3. Beneficiaries of the trust are identifiable.

4. Trust documentation is provided by the trustee of the trust to the IRA custodian by October 31st of the year following the death of the IRA owner.

The following steps must be taken in order to allow for stretch distributions to a qualifying trust beneficiary.

At the death of the IRA owner, a copy of the trust or a listing of the trust’s beneficiaries and their entitlements must be provided to the IRA custodian by October 31 of the year after the IRA owner’s death.

A properly titled inherited IRA must be set up for the trust beneficiary. An example of proper titling is “John Jones, deceased, IRA fbo John Jones Family Trust.”

The trust must obtain its own federal tax ID number if it does not already have one. This tax ID number will be used by the inherited IRA for all tax reporting to both the trust and the IRS.

RMDs then go from the inherited IRA to the trust each year. The trustee of the trust makes distributions to the trust’s beneficiaries.

The one thing that should never be done is to move all the IRA assets to the trust. Any distribution from the IRA to the trust is a taxable event to the trust. A trust can never own an IRA since it is not an individual. It can be the beneficiary of the trust, but not the owner.

 

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