How to pay tax when a Trust inherits an IRA?
A Revocable Living Trust, now Irrevocable as the surviving Trustor has died, has received $90,000 IRA-CD money to be added to $30,000 non-qualified money. The trust has all the language required by the IRS to qualify as a conduit trust.
A church is 50% heir of the trust assets. Six other people are equal heirs to the other half of trust assets (1/12th each). There will be about $7,500 in Ohio estate tax due and no Federal estate taxes, and some minor trust expenses (mostly for tax preparation)..[Let’s ignore the taxes and expenses to be paid so the numbers are easier: $120,000 in the trust, 75% is IRA and 25% is non-qualified money.]
Question #1: Does all money need to be combined and then distributed? Meaning that the church gets 75% IRA money and 25% non IRA money, ditto the six people? Or can the church get 100% IRA money –no taxes to be paid, and the people then split the other money? That means the church gets $60,000 of IRA money and each of the six gets $10,000 each which consists of $5,000 IRA and $5,000 of non-qualified.
Question #2: Who pays the taxes on the IRA money? Does the trust pay taxes at the trust rate or, since the language in the trust qualifies it as a conduit trust, can the trust pay out the IRA money to the six people and the church and the trust issue 1099’s to each and the people pay at their rate and the church pays none? I hope this is the case. If it is, where in the tax code can I find any language to back this up?
Permalink Submitted by charles lore on Wed, 2009-10-28 04:30
A couple of issues I spot right off the bat.. You say trust has received funds from the IRA. That says to me that a taxable distribution has taken place and the IRA is gone . If what you really meant was that the trust is the beneficiary of the IRA then another problem arises. A church is not a designated beneficiary since it is not a person.This in turn means the trust cannot be a designated beneficiary meaning the money has to be distributed according to rules that are contingent on IRA owners age and when he died. More info is needed.
Permalink Submitted by Harve Senter on Wed, 2009-10-28 13:21
Thank you, let me clarify. Three IRA CD’s totaling $90,000 had the trust listed as the beneficiary to the IRA. No ‘stretch” is desired. Trust language states six people [1/12th each] and the church [50%] are the beneficiaries to all trust assets. Lump sum payments will occur to all heirs, ASAP. Again, answers to the two questions are requested:
Can the church get all IRA money and the people 50/50 IRA/Non-Qualified split?
Does trust pay taxes first at a trust rate or can the six people and one church get a 1099 from the trust and each pay taxes at their own taxable rate?
Again, thank you for your question.