Qualified Trust as bene for an 401K and 403b
I have a prospective client who married for the 2nd time. There are children from the husband’s prior marriage. They signed a pre-nuptial agreement but did [b][b]NOT[/b][/b] sign a POST marriage waiver of community poroty righrts for the 401K and 403B accounts which is required by CA law. Both the 401K and 403b named the qualifed trust. The husband died on 10/1/08, 27 days before his 72nd birthday and had begin to take his RMDs. My prospective client, his wife (the 2nd wife) is the Successor Trustee. At this time, , the 401K is currently in her deceased husband’s name and the 403b is in the name of his trust. Fidelity is managing these accounts. The current value is about $100,000. There are 6 designated beneficiaries, one of which is my prospective client ,age 64 (the deceased’s spouse at time of his death) gets 9%, 35% goes to each of his two daughters (ages in mid 30’s) from his first marriage and 21% to 3 other beneficiaries.
My prospective client wants to pay out monies according the intended pre nuptial agreement and the percentages of the trust and close the trust by the end of June 2009 (9 months after date of death).
Before she rolls over the accounts to her IRA, my prospective client wants to pay out the 21% to the 3 other beneficiaries named by the trust. She is under the impression that THEY, the beneficiaries will pay takes on the distribution and issue them a K-1 form. This doesn’t sound correct to me. However, she did state that if this is not possible, before she rolls over the monies to her IRA account, she will make a distribution to the three (3) 21% beneficiaries and SHE will withhold any taxes on these distributions that have to be paid by HER. Is that allowed?
Any input on this? I am not clear as to how any rollovers or distributions are made because of the qualified trust. Thanks
Permalink Submitted by mk foss on Wed, 2009-02-25 22:25
Normally when a trust is a beneficiary, the trust remains in place for a number of years instead of being distributed immediately. If the intention was immediate distributions, it would have been easier to name each of the beneficiaries separately.
You should determine if the two plans will allow a “non-spouse rollover” to an inherited IRA. If that can be accomplished it will be easier to move forward.
The attorney who drafted the trust agreement (or another estate/probate attorney that the trustee is working with) should determine whether the trust is supposed to terminate immediately and have all of the taxes paid so quickly. Bruce Steiner has written articles that show how a spouse who is the beneficiary of a trust, can roll over benefits. This would work best from the inherited IRA and not the two retirement plans.
If the trust remains in place, distributions would be made based on the life of the oldest beneficiary as of the date of death – probably the surviving spouse – even if her benefit is separated and rolled over to a new IRA. When a qualified trust is the beneficiary, the RMD is taken from the IRA each year and transferred to the trust. The trust agreement determines whether it is distributable currently. If it is, the liability for the taxes will follow the distributions. If no distributions are required currently, the trust pays tax.
Since RMDs have been waived for 2009 additional time is available to sort this out but cashing out both plans entirely before the end of this year will cause a lot of income taxes to be paid.