Living Trust IRA Beneficiary
Have a client who is transferring IRA from current custodian to our custodian. IRA is titled “XYZ Custodian for John Smith, Deceased, FBO The Smith Family Trust, Mary Smith Trustee (Mary and John were grantors and trustees). I believe John Smith died after starting RMD’s. Mary Smith is his spouse and as far as I can tell the Family Trust is still revocable. Not sure of the intent here, but Mary Smith believes she has been receiving the RMD’s (direct deposited to her checking account). Should she not being paying this out to the ultimate beneficiaries of the family trust, her two children, since they are the ultimate beneficiaries of the trust? Also, would not the RMD’s need to be paid out over the eldest child’s life expenctancy?
Thank you!
Tim G
Permalink Submitted by Alan Spross on Wed, 2010-04-14 18:51
You are correct. Any and all post death distributions from the IRA should be made to the trust and deposited into the trust’s account. From there the funds are handled according to the terms of the trust with respect to accumulation or distribution to the beneficiaries. If the trust is qualified for look through treatment RMDs are based on the oldest trust beneficiary and separate account rules do not apply.
The 1099R will be issued to the trust until the trust can be legally terminated. She needs to transfer the amounts deposited to her own account into the trust’s account ASAP.
Permalink Submitted by Tim Golden on Wed, 2010-04-14 20:07
OK, I’ve gotten a bit more information….it looks like, in fact, that the distributions have been going to a bank account in the trust name, so that’s good (and the tax I.d. number is the surviving spouse’s (Mary’s) social security number). It is my understanding that the terms of trust allow for distributions to the spouse during her lifetime, then to the children upon her death. If that is, in fact, the case, whose life are the RMD’s based on? Thanks again,
Tim G
Permalink Submitted by Alan Spross on Wed, 2010-04-14 20:16
I think she needs to get a TIN for the trust since it is now irrevocable. Her SSN should not be used for the trust even though she is the sole trustee.
The RMD is based on the oldest trust beneficiary if the trust is qualified.
Permalink Submitted by Tim Golden on Wed, 2010-04-14 20:53
The trust was only irrevocable as to the decedent spouse’s marital share and there weren’t enough assets, so designation of assets to the marital trusts and family trusts wasn’t necessary. in that light, how would I determine if the trust is “qualified”? Would you still use the oldest beneficiary life expectancy (oldest child in this case) for RMD purposes? Thanks for your input, Alan.
Permalink Submitted by Bruce Steiner on Wed, 2010-04-14 22:48
That sounds like it’s backwards. Occasionally someone creates a marital trust that the spouse can revoke. There’s no harm from an estate tax standpoint since it’s in the spouse’s estate anyway. But the credit shelter (family, bypass) trust isn’t revocable (or else you’ve thrown it into the spouse’s estate). If the estate is too small to fully fund the credit shelter trust, then everything goes into the credit shelter trust, and there is no marital share.
Of course, a revocable marital trust really doesn’t make any sense. You don’t get the opportunity to not elect QTIP. If you were going to create a marital trust that the spouse can revoke, you might as well just leave the marital share to the spouse.
And if the estate is of modest size, it would generally make more sense to leave the IRA to the spouse, so she could roll it over, and possibly convert to a Roth.
But if somehow it’s sufficiently peculiar, and in fact the IRA went to a trust that the spouse could revoke, there have been numerous rulings that treat the IRA as if it had gone directly to the spouse. See my article on this in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf.
While revocable trusts can be useful in some cases, they don’t necessarily make sense in all cases; and leaving an IRA to a revocable trust rarely makes sense.