Multiple Beneficiary IRA through Trust
I have run into something with the custodian of my Dad’s IRA. I have three siblings and we intend to split the IRA into four individual IRA’s. My father passed on Sept 24 without taking this year’s RMD. The trust is the bene of the IRA, we are the bene’s of the Trust.
My intention was to take the RMD into the trust as cash and distribute it to the four of us as income with K-1 forms. Next year, as the dust settles and the 6 month alternate valuation passes, we would split the IRA.
American Funds says “no can do”. If we take the RMD in the trust then we are stuck taking all distributions through the trust over 5 years.
We are now scrambling to get the IRA split before year end. I haven’t seen any reference to this sort of restriction in my research. Everything says just that the split has to take place before 12/31 of the year after the year of death.
Permalink Submitted by Alan Spross on Sat, 2007-11-10 04:11
Sorry to hear of your loss.
This suggests that American does not consider the trust as qualified for look through treatment and that your father died prior to his required beginning date. Take a look at p 38 of Pub 590 for an explanation of the requirements for a qualified trust and/or check with the attorney who drafted it to determine if is is qualified and why not.
You will also note on p 38 that the separate account rules do not apply to trust beneficiaries. This does not mean that if the trust is allowed to terminate that separate accounts cannot be established at that time, but that the RMD calculation of using the oldest trust beneficiary is permanent.
That might not be too bad if you are all in a narrow age range.
If all of you are in total agreement that the trust is flawed and needs to be altered, you could retain legal counsel to take the issue to the probate court. If the trust is set aside, you would then encounter the IRA custodian’s business and administrative procedures and/or provisions in the IRA agreement.
You also refer to the 6 month valuation, and that suggests that a federal estate tax liability is expected. If so, the origin of funds to pay the estate tax comes into play, and in certain cases the IRA assets could be called on.
At this point, you should slow down and get a handle on all these issues. There is no impending deadline here, and even if his RMD is not taken prior to year end, you can easily get the excess accumulation penalty excused by the IRS in this situation. There are several issues here that are not clearly defined, but you have the time to investigate them. If the trust is qualified, you have until next Oct 31 to get it into the hands of American Funds.
Permalink Submitted by Matt Werner on Sat, 2007-11-10 04:35
Thank you for the quick reply.
By required beginning date, I think you mean that his age was 75 and had already taken several RMD’s.
I believe the trust meets the standard as qualified though I don’t know if American has seen it yet. I think its still in the hands of the broker.
The attorney that drafted the 1999 version of the trust passed away 10 days before my father.
We have retained an attorney/accountant, that I need to check with.
The age range of the bene’s is 43 to 53.
There are enough funds outside the IRA to pay the expected Estate Taxes.
I had read your comment elsewhere about the IRS excusing the excess accumulation penalty and suspect that the date of death relative to year end makes that likely in this case.
Our accountant indicates that most of our effort will be in the Feb time frame, after year end, but before tax season.
Our desire is to split the IRA, and we believe the trust supports that, we just don’t want to get into a penalty situation. We’re already sending enough into the Washington money pit.
Permalink Submitted by Bruce Steiner on Sun, 2007-11-11 00:40
Why would anyone leave an IRA to a trust in which the beneficiaries of the trust (the IRA owner’s children) receive their shares outright? If you want the beneficiaries to receive their shares outright, why not simply leave the IRA (and the other assets) to the children, without running it through a trust? Or, if you’re leaving the IRA in trust rather than outright, why not let the trusts continue, to keep the children’s shares out of their estates, and to protect against the children’s potential creditors (including spouses)?
Anyway, back to the case at hand. If you’re having a problem with American Funds, you may want to set up a beneficiary (inherited) IRA for the trust at American Funds, and then set up a beneficiary (inherited) IRA for the trust at a friendlier financial institution, and then divide the IRA at the new financial institution.
Since you have an attorney, he/she should be able to help you with this.
Permalink Submitted by Matt Werner on Sun, 2007-11-11 02:37
Mr. Steiner
To Quote an earlier post of yours:
“Unless the amount involved is too small too warrant administering a trust, we generally recommend that clients provide for their children in trust rather than outright, to better protect the inheritance against the child’s potential creditors (including spouses), and to keep the inheritance out of the child’s estate for estate tax purposes.”
Is the IRA somehow different that what you proposed in that post?
“Or, if you’re leaving the IRA in trust rather than outright, why not let the trusts continue, to keep the children’s shares out of their estates, and to protect against the children’s potential creditors (including spouses)? ”
By trusts are you assuming that multiple trusts were created for the bene’s? The Trust is a Revocable Living Trust owned by the decedent. I believe leaving the IRA in the trust would subject the RMD’s to the tax brackets (awful) of the estate.
The desire is to create four separate enherited IRA’s, that can be stretched based on the separate ages of the four bene’s. I was just trying to take this years RMD (to keep the IRS happy), so that we could delay the split to make the accounting of the 6 month alternate valuation easier.
Permalink Submitted by Bruce Steiner on Sun, 2007-11-11 02:59
One of the limitations of a forum such as this is that without seeing the actual documents (the beneficiary designation and the Will or trust) we can’t always be sure exactly what the facts are from the information presented, especially when the poster is not a lawyer. Another limitation is that sometimes a question that was not presented is more important than the one that was presented.
You are correct that, unless the amount involved is too small to warrant administering a trust, we generally prefer to have IRAs (and other assets) go to children in trust rather than outright.
It appeared from the facts presented that the IRA owner created a revocable trust, left his IRA to the revocable trust, and then the revocable trust provided that the children received their shares outright. If that is not correct, please clarify the facts. If that is correct, and if the IRA owner wanted his children to receive the IRA outright (notwithstanding our general preference for having children take in trust), then he could simply have named his children as the beneficiaries of the IRA. Had he done so, these problems would not have arisen.
As an aside, while revocable trusts are useful in some cases (and in some states where probating a Will is reported to be difficult), they are used far more often than necessary. They do not save taxes, and in most cases they do not significantly reduce the cost of the estate administration.
You are correct that trusts reach the top (35%) Federal income tax bracket at $10,450 of taxable income, while individuals do not reach the 35% Federal income tax bracket until $349,700 of taxable income (in 2007 in each case). But if the Will (or in your case, the revocable trust) is well drafted, the trustees will have discretion to make distributions to the beneficiaries, and if, considering all of the facts and circumstances, including income taxes, it makes the most sense to make distributions so that the income will be taxed to the beneficiaries rather than to the trust, the trustees can do so. But often it makes sense to leave the income in the trust, notwithstanding the income tax rates. Many beneficiaries are in relatively high income tax brackets, if not 35% than often 28% or 33%. Many middle-class beneficiaries are in the 35% bracket due to the AMT exemption phaseout. It’s often possible for trusts not to have to pay state income tax in any state (states have different ways of determining when a trust is taxable in that state, and it’s often possible for a trust to take advantage of this so as not to have to pay tax in any state). And the ability to keep the trust assets out of the beneficiaries’ estates and to protect the trust assets against the beneficiaries’ potential creditors (including spouses) may be worth paying some additional income tax (especially if the difference is modest). Finally, as noted above, you can give the trustees discretion to make distributions, so they can, on a year-by-year basis, decide whether to accumulate the income in the trust and pay income tax at the trust’s rates, or to distribute the income to the beneficiaries. This flexibility can include the power to make distributions to grandchildren — for example, if a grandchild is a student, there may be an income tax savings (albeit less often than before the expansion of the kiddie tax) by making distributions to the grandchild.
In any event, the attorney should be able to resolve the issues originally presented.
Permalink Submitted by Al Fry on Sun, 2007-11-11 19:04
Something in the original post doesn’t add up. First, if the owner was 75, the 5-year rule does not apply. Second, if the trust was the bene, then the trust should take the RMD by the end of the year. Third, American Funds, being one of the largest mutual funds companies, generally handles these things correctly. I’m not sure why the trustee cannot get four inherited IRAs set up using age 53 for RMD purposes (I don’t think there is a choice here), then transfer these acounts to the children when the trust terminates. As Bruce has stated, if the intent was to have each child use there own age for RMD purposes the trust is not the usual way to do that.