ira trust
Hey there I was hoping to get in full detail how the ira inheritance trust works and also pros and cons. If you want to email me you can also at: [email protected] Thank You
Hey there I was hoping to get in full detail how the ira inheritance trust works and also pros and cons. If you want to email me you can also at: [email protected] Thank You
Permalink Submitted by Bruce Steiner on Wed, 2008-02-13 00:00
The reasons for leaving assets to a child in trust rather than outright are to better protect the inheritance against potential creditors (including spouses), and to keep the inheritance from being included in the child’s estate for estatet tax purposes. The same reasons apply in the case of IRA benefits as in the case of other assets.
The one complexity with IRA benefits is that, in order to be able to stretch the benefits out over the oldest beneficiary’s life expectancy (often the oldest child’s life expectancy), the trust must be set up so that none of the accumulated IRA distributions to the trust can ever go to anyone older than the oldest desired beneficiary.
The trusts that will receive the IRA benefits can be created in the Will, or in a separate trust instrument.
While drafting for the complexity described in the second paragraph can be a bit tricky (but see PLR 200235038 for an example of something the IRS approved), this isn’t really anything new — just that someone tried to make it into a marketing gimmick. It shouldn’t cost much more to included this in your Will than it would if you were leaving your estate to your children outright, or in trust to a specified age or ages.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Jonathan Hammel on Wed, 2008-02-13 23:53
Now my other question to you is what is the tax implication on ira trust, is it one set % or does it vary
Permalink Submitted by Bruce Steiner on Thu, 2008-02-14 03:32
A trust pays income tax on the income not distributed. For example, if a trust has $10,000 of income and distributes $5,000 to a beneficiary, the beneficiary pays tax on $5,000, and the trust pays tax on $5,000. If the trust distributes $15,000 to a beneficiary, the beneficiary pays tax on $10,000 (since the trust only had $10,000 of income). So the trust offers some flexibility.
Different states have different ways of determining when a trust is subject to state income tax in that state. So it’s also often possible to set up a trust so that it won’t be subject to state income tax in any state.
The tradeoff is that trusts reach the top (35%) Federal income tax bracket at $10,700 of taxable income in 2008. So if the beneficiaries are in lower income tax brackets, there is some additional income tax cost to accumulating income in the trust. Depending upon the situation, that may be a small price to pay for the estate tax and asset protection benefits of the trust, and in any event if the trustees think income taxes are an important consideration in a given year, they can distribute the income that year to one or more of the beneficiaries of the trust.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL