IRA Beneficiary Confusion
Dad’s DOD was 3/11/08 at 81yrs. He was legally incapacitated and Mom was the full POA. Their broker switched firms in 2004 and filled out the beneficiary form and primary benef. as ‘The Estate of….” and told Mom to sign as POA. He never explained stretch out options claiming that this was the way the beneficiary form was completed at the previous firm; the way it was originally filled out in 1992 before Dad’s stroke. The value of the IRA was just over $500K. Dad had a will leaving everything to a trust for the benefit of Mom.
1. I am being told by accountants that you can put an IRA into a trust. I work in investments as an assistant… and never heard that you could keep the IRA in tact and still hold it in a trust. I would think you need to distribute it first and be taxed as ordinary income first. They keep calling it a Trust IRA. Is there such a vehicle?
2. What is the best suggestion in this situation to minimize taxation to Mom ? (the estate taxes don’t apply since his estate was under the 2mm threshold.
Permalink Submitted by Bruce Steiner on Sun, 2008-08-17 13:48
You can leave an IRA to a trust. Depending upon the terms of the trust, the trustees may be able to stretch the IRA out over the life expectancy of the oldest beneficiary of the trust. For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
If the IRA is payable to the estate, and the estate is payable to a trust for the spouse, then, depending on the terms of the trust, it may be possible to get the IRA to the spouse so she can roll it over. Even if the terms of the trust are not such that this option would be available, it may be possible, with enough disclaimers, to get the IRA to the spouse so she can roll it over. For more on this, see my article on this subject in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf
The best suggestion is to consult with the attorney handling the estate, or with other tax/estates counsel, who can provide specific advice based Mom’s situation, the terms of the Will, and Mom’s objectives.
Permalink Submitted by Donna Castorina on Sun, 2008-08-17 14:53
Thanks so much for your quick response! This gives me new hope for getting this set up correctly as a spousal rollover to utilize stretchout options.
Under the original terms the way it is set up, if I understand everything correctly, the IRa would get retitled as The Irrev. Trust of John Doe, John Doe, Deceased. This way we are not creating a taxable event by actually disbursing the positions until required?
A few more details and another question for your opinion:
Dad’s will names mom as full beneficiary via the trust vehicle, she is the sole executrix and sole trustee. As a full beneficiary and with full discretion to disburse to herself. From the readings on disclaiming IRA assets ….
1. Should she petition for the estate to disclaim the ira assets and roll them directly through to her own IRA? Or…
2. If she decides to discontinue the trust (which she would like to do) Can the trust disclaim the IRa assets and let it then pass to her as the spouse?
Which option is the most viable? Is there enough precedent in one or the other ways to accomplish this that one approach might be more successful than the other?
On a side note: you and this site have been more helpful than the attorney , the broker-dealer and her existing accountant. I’ve been researching this on my own and have switched all of moms professionals except the attorney to date. This is the first time since Dad passed away that I’ve felt ready with coherent and legitimate information to proceed with helping my mother. Thanks again.
Permalink Submitted by Bruce Steiner on Sun, 2008-08-17 15:20
While that was the case in some of the rulings cited in my article, it’s unusual to create a trust in which the spouse has the power to withdraw all of the trust assets. One would usually either leave the assets to the spouse outright, or in a trust in which the spouse did not have this power. Are you sure the spouse has that power in this case?
Without seeing the Will, there are too many questions and too many branches to respond intelligently. But after seeing the Will, it shouldn’t be that difficult to recommend how best to proceed.
Permalink Submitted by Donna Castorina on Mon, 2008-08-18 00:55
Unfortunately, the answer to your question is yes…. the will has wording that states that the trust is set up to benefit my mother completely. My mom is the sole trustee and she has the option to utilize the assets for herself in any way.
The trust was set up sometime in the early 90’s, and never changed after the estate and gift tax laws changed.
In the end, I know that my father’s intent was to simply take care of my mother. The trust was definitely not set up because she was incapable of handling her finances. And, there is no dispute among the family that the assets are hers.
I’m so frustrated since she had recently checked with both her atty. and B/D as my father was failing, just to insure everthing was set up properly. No one seems to share my panic and frustration that the assets cannot be rolled immediately to her own IRA. At this point, I’d like to just be sure that we take best action to avoid liquidating the assets or being taxed at a higher rate than my mother’s individual ordinary tax rate.
Permalink Submitted by Bruce Steiner on Mon, 2008-08-18 01:56
If in fact Dad’s estate leaves his entire estate in trust for Mom, and Mom is the executor and trustee, and Mom has the power to withdraw all of the trust assets, then Mom should be able to roll the IRA over into her own IRA.
Mom may need (or want to get, given the amount involved) a private letter ruling from the IRS in which they confirm in writing that she can roll it over into her own IRA. The IRA custodian may want her to get such a ruling. But, as discussed in my article, if these are the facts, it shouldn’t be a difficult ruling to get. We obtained a ruling in a similar situation.
Dad might also have left his non-IRA assets to Mom in a trust that would not have been included in her estate, and that would have been protected against her potential creditors, including future spouses, and which might have been better protected if she ever goes into a nursing home and wants Medicaid).
On these numbers, and given this Will (if the facts are as you describe), it may be worth the effort to consult with an attorney more knowledgeable in this area.
Permalink Submitted by Donna Castorina on Mon, 2008-08-18 11:47
How does one obtain this kind of letter ruling?
Permalink Submitted by Bruce Steiner on Mon, 2008-08-18 13:14
You (or a lawyer on your behalf) apply to the IRS National Office for a private letter ruling.
Permalink Submitted by Alan Spross on Mon, 2008-08-18 21:34
As I see it, pursuing the rollover would be important in this case to the extent Mom is younger than Dad (81 or 82), but perhaps more so for your own stretch options. In this case, the estate is the actual IRA beneficiary for RMD purposes even though the testamentary trust will receive the IRA distributions. Since the estate beneficiary governs the RMD as a non individual beneficiary, it is immaterial whether the trust is qualified for look through treatment or not.
Accordingly, without the ability for a spousal rollover, Dad’s remaining life expectancy of about 9 years would apply to the RMD, whereas Mom’s use of the Uniform Table could more than halve that rate unless she is older. However, if she can do the rollover and names the children as her beneficiaries, the children will then be able to use their own remaining life expectancies for RMDs at her passing rather than having the withdraw over the schedule Mom must use.
Permalink Submitted by Bruce Steiner on Mon, 2008-08-18 21:45
The stretch is even more valuable if Mom can convert to a Roth.
Permalink Submitted by Donna Castorina on Tue, 2008-08-19 03:26
Thank you for the additional information. I’ve been researching alot on PLR’s today and the process.
To your point of stretch out options, I agree this is important and in this case an option that makes alot of sense. She would like to then name all her children as beneficiaries. Mom is younger than Dad was and that should factor favorably in the event we can get this rollover approved. The B/D has automatically said that she cannot disclaim the estate assets through the trust, so I don’t think I’m going to get anywhere without the PLR.
Some questions on this:
1. Should Mom ‘disclaim’ the assets of the trust first and then ask for a ruling on the ability to claim the IRA assets for a spousal rollover?
2. My brother and I are beneficiaries of the trust if Mom dies only; other than that we have no claim on the assets. Should we each complete a disclaimer of any interest in the trust?
3. I have been trying to find the fee schedule to file for this and I am positively lost in the Internal Revenue Bulletin 2007-01. Is there an easy way to find this information? I called the IRS and they couldn’t/wouldn’t give me the info and referred me back to the bulletin.
4. The suggestions of converting $500K IRA to the Roth? How much more advantageous is this to taking annual RMD’s? Or is it just as the children who would be named under the stretchout options who would benefit?
Sorry for so many questions… but this is a terrible way to learn how not to make beneficiary mistakes.
Permalink Submitted by Donna Castorina on Tue, 2008-08-19 03:45
One more question… the trust was irrevocable under my father’s will. How does this factor into this situation?