RLT as primary beneficiary of IRA
An individual named his Revocable Living Trust as the primary beneficiary of his IRA. This individual passed away earlier this year. The deceased IRA owners’ 3 children are equal beneficiaries named in the trust. From my understanding, the children are allowed to take lifetime distributions from the IRA based on the life expectancy of the oldest because the trust was named as primary beneficiary. My question is this…Can each child still do a trustee to trustee transfer of their share of the IRA into their own “inherited IRA” account now (while still using the life expectancy of the oldest)? My understanding also is that the trustee (one of the 3 children) must provide the current custodian with a copy of the trust showing the three as beneficiaries of the trust. Thanks for your feedback.
Permalink Submitted by Alan Spross on Tue, 2008-11-04 22:21
Even though the trust is a named beneficiary, it must still meet the requirements for look through treatment to enable IRA RMD to be based on the life expectancy of the oldest trust beneficiary. See Pub 590, p 39 for those requirements.
If the trust provisions allow, the separate accounts can be created for each trust beneficiary, but this would not change the RMD treatment noted above. The IRA custodian will require a copy of the trust by no later than 10/31 of the year following the owner’s death.
Permalink Submitted by Michael Hoye on Tue, 2008-11-04 23:00
Thanks for the response. Assuming the Trust qualifies as a look through trust, is there any “standard language” in a RLT that might show that seperate accounts can be created for each beneficiary or is this more of an exception?
Permalink Submitted by Bruce Steiner on Wed, 2008-11-05 14:43
It would probably be fairly easy to tell by looking at the trust, and fairly difficult to tell without looking at the trust. You may want to ask the attorney handling the estate.
Why would anyone bother creating a revocable trust, leave the IRA to the revocable trust, and then have the revocable trust pay out to the children. It would have been much simpler to name the children as the beneficiaries of the IRA.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Michael Hoye on Wed, 2008-11-05 14:58
Thanks Bruce. I agree about naming the RLT as the beneficiary. Unfortunately for the beneficiaires, the father didn’t know any better.
Permalink Submitted by Bruce Steiner on Wed, 2008-11-05 15:03
Revocable trusts can be useful in some cases, but for most people they are not worth the effort. While they are promoted as a way to avoid probate, probating a Will is generally not difficult, expensive or burdensome. There is also a cost and complexity to creating and maintaining a revocable trust, often comparable to the effort involved in probating a Will.
Often in the process of creating a revocable trust, clients are distracted from the more important issues. That appears to have happened here.
The above may not be applicable in California, for reasons unique to that state.
Permalink Submitted by mk foss on Thu, 2008-11-06 02:38
Thank you for the California mention, Bruce.
Although trusts are recommended for most purposes, they’re not always the best for retirement plan beneficiaries. They are great for forcing the beneficiary to take RMDs over life expectancy but in the case of 3 adult children as beneficiaries of the trust that receives the IRA – I wouldn’t have recommended it.
Permalink Submitted by Bruce Steiner on Thu, 2008-11-06 21:52
He might have left the IRA to the children in separate trusts for their benefit rather than outright. But it made no sense for him to leave the IRA to a trust that ends at his death.
Permalink Submitted by Michael Hoye on Tue, 2008-12-09 21:36
Coming back to this earlier post…I have spoken with a couple of IRA Custodians regarding this issue. They clearly told me that the current custodian may or may NOT choose to set up three (3) seperate inherited IRA’s in this situation. What they did say is that if the trust qualifies as a look through trust, and the beneficiaries of the trust (the 3 adult children) want to receive distributions based on the life expectancy of the oldest beneficiary, the new inherited IRA must be “trust owned” and RMD’s will be made to the trust each year. It would then be up the the trustee to pay the respective beneficiaries. I was told the current IRA custodian may only set up one inherited IRA. This brings up a couple questions…
1. Is there any hard core rule on what can and can not be done?
2. If the new inherited IRA does in fact have to be trust owned, whose tax rates will be used for the RMD’s (trust or oldest beneficiary).
If there is any personal experience with this issue I’d appreciate the feedback. Any information to substantiate this is also helpful. Thanks.
Permalink Submitted by Bruce Steiner on Tue, 2008-12-09 23:02
Set up a single inherited IRA, and then transfer it to a friendlier custodian that will allow the trustee to divide it into three separate inherited IRAs, one for each child. The larger financial institutions should have done this many times and should be familiar with this.
Permalink Submitted by Michael Hoye on Tue, 2008-12-09 23:56
Thanks Bruce. PLease confirm though…The RLT will own the inherited IRA? Presently, it is with Wachovia which means we need Wachovia to establish the inherited IRA first (and hopefully they will establish 3 seperate inherited IRA’s)
Permalink Submitted by john walicki on Sun, 2011-07-17 19:09
I have a situation where a married couple formed a RLT and named each as the trustee. Both are over 80 years old. Husband died in April 2010. Each had a Traditional Ira with a large mutual fund company. Shortly after husband’s death, she contacted the mutual fund company several times and said she would like to become the “Owner” of her husband’s Ira rather than as a “Beneficary of an Inherited IRA”. When she went on the computer and printed a Asset Verification Report, it showed her Traditional IRA, their RLT account and her name-Inherited IRA. She wanted to be the Owner of her late husband’s Traditional IRA and not the Beneficiary !! When she retrieved the Beneficiary Information of her late husband, it showed as Primary Beneficiary the following: To the trustee of their RLT. Since the husband and wife were the only trustees of their RLT, then in effect, the widow was the Primary Beneficiary. Her problem is that the Mutual Fund Company is showing that she Inherited the IRA and was not the “Owner”. As owner she could spread the RMD over a longer period than if she was considered a Beneficiary of an Inherited IRA. Is it possible to have the Mutual Fund Company retitle the Inherited IRA to the widow’s name and combine it with her Traditional IRA as though she owned it all along? On the widow’s IRA her primary beneficiary is her son and the secondary beneficiary is her grand-daughter. Upon her death she would like her son and grand-daughter to be able to Stretch the Ira as far as possible.
Permalink Submitted by Bruce Steiner on Sun, 2011-07-17 19:29
in response to ahoyem8: as set forth above, the trustee will set up a single inherited IRA at Wachovia. If Wachovia won’t let the trustee divide it into three separate inherited IRAs, one for each child, the trustee will tranfer the inherited IRA to a friendlier custodian that will allow him/her to do this.
in response to johnwalicki: depending upon the terms of the trust, it may be possible to get the IRA to the wife so she can roll it over into her own IRA. I wrote an article on this in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf.
In both ahoyem8’s case and johnwalicki’s case, the custodian may require a private letter ruling or a legal opinion.
Why do so many IRA owners create so much unnecessary complexity and expense? In ahoyem8’s case, the IRA owner could have simply named his children as the beneficiaries. In johnwalicki’s case, the IRA owner could have simply named his wife as the beneficiary.