Trust as a Beneficiary!
I have an 81-year old client who wishes to put her two annuities into a trust. She has a qualified annuity and a non-qualified annuity. I believe there is specific wording that must be put on the beneficiary form for the qualified annuity so she does not get hit with a tax bill when she moves the money. Is this correct? If so, what is that wording? Also, to be safe, is there any special wording needed for the non-qualified annuity as well?
Permalink Submitted by mk foss on Thu, 2010-01-28 18:37
Normally the trusts would be the beneficiary of the annuities – they don’t get “put into” a trust.
You really need to know why the client wants the trust as a beneficiary. There are some good reasons for retirement plan assets to be payable to a trust – those reasons have to out weigh the detriments from an income tax standpoint when the trust is the beneficiary. If there is no estate tax or if the exemption comes back to $3.5 million – paying income taxes at 35% when you’re not avoiding any estate taxes is burdensome.
Nonqualified annuities are taxed annually on the growth (instead of just on withdrawals) to the trust beneficiary after the death of the owner.
The special wording is needed after the death of the owner, not when the trust is named as a beneficiary.
Permalink Submitted by Brian Knott on Fri, 2010-01-29 00:25
Just for clarification, as estate taxes or exemption do not apply in this case are you saying that if she makes a trust the beneficiary of her IRA annuity she will subject herself to an immediate 35% tax bill?
Permalink Submitted by Al Fry on Fri, 2010-01-29 05:10
If the trust qualifies as a see-thru, the IRA can be stretched over the life expectancy of the oldest bene of the trust. Non qualied annuies payable to a trust will trigger immediate tax on the gain at the owner/annuitant’s death, along with a lump sum payout. The IRS does not allow a “Stretch” for non-qual annuities payable to non-natural benes.
Permalink Submitted by Brian Knott on Sat, 2010-01-30 17:59
So if the trust qualifies as a see-thru the IRA can be stretched for the oldest bene, but if it doesn’t qualify as a see-thru she is looking at a 35% tax bill correct?
Permalink Submitted by mk foss on Sun, 2010-01-31 01:05
If the trust qualifies as a “see through” required minimum distributions are based on the age of the oldest trust beneficiary. The RMD would be calculated, removed from the qualified annuity and paid to the trust. Based on the trust agreement, you determine what happens next. If the agreement says you pay out the RMD, it is paid to the beneficiary. The obligation to pay the income tax will follow the funds. If they stay within the trust, the trust pays the tax. The trust rates are compressed and the 35% bracket is reached at $11,200 for 2010.
If the trust is not a “see through” the measuring life for RMDs is the decedent’s life – or actually the attained age of the decedent at death. The RMDs are likely to be higher in amount. The same procedure applies as described above. The tax on the RMD is paid by whomever has the funds.