IRA Beneficiary is Trust
Trust names 5 beneficiaries (us 5 kids). I am the Trustee.
I am being told by an advisor that we can convert this thing to some sort of “family stretch IRA” whereby there will be a yearly RMD based on oldest child’s life expectancy, and then yearly RMD will be split 5 ways (equally), with each child only paying tax on it as ordinary income, thus allowing the funds to continue accumulating tax-free and avoiding any Trust taxation. Is this true?
Even if it is allowable, can any particular child ask for all of their share at any given point in time, and if so, I would imagine the money would be at ordinary income rates again, and would early withdrawal (I am only 51) penalties be applied?
Permalink Submitted by Al Fry on Sat, 2008-02-09 15:56
If it is a qualified see-through trust, then yes, RMDs are based on the oldest benes age. The trust language dictates what is paid out of the trust. The distributions from an inherited IRA are penalty free, since they are due to death of owner.
Permalink Submitted by Sheila Plemich on Sat, 2008-02-09 19:48
Thanks, I found info on look-through or see-through trusts. Next question: How is RMD taxed? At Trust rates or at the individual bene (Trust bene, really) ordinary income? If it’s Trust rates, then it’s all the same to me to pay all the tax at once (out of Trust) and invest the money however I like now. Even if my share is at my marginal rate, I might still want to avoid the admin. hassle and just take all my share now. My concern is the admin. stuff required to set up this thing and ongoing costs–there would be annual tax returns on the whole Trust, right? And I assume that any bene (there are 5 of us) can take all their money at any point in time, which results in some admin. nonsense?
Permalink Submitted by Al Fry on Sat, 2008-02-09 23:12
The RMD is taxed to the trust, since the trust receives the RMD. However any income that the trust pays out (via a K-1) is deductible by the trust and taxed at the recipient’s level. A bene cannot normally “take their share”, unless the trust allows. That would be somewhat unusual, as there would be little or no reason for the trust.
Permalink Submitted by Bruce Steiner on Sat, 2008-02-09 23:38
Can the trust be divided into five separate trusts, one for each child?
Permalink Submitted by Al Fry on Sat, 2008-02-09 23:43
If the trust so allows. B. Steiner may have some input on this, he’s the trust expert.
Permalink Submitted by Bruce Steiner on Sun, 2008-02-10 04:00
It’s not possible to have any input without seeing the terms of the trust. But the attorney handling the estate should easily be able to answer these questions