Trust as beneficiary of 403(b)

Submitted by Rob Gilbreath on Wed, 2011-01-05 17:54

Mates – it’s been some time! Happy New Year to all.

Query: client named RLT (that would qualify as “see-through”) as primary and sole beneficiary of her 403(b) plan. The trust has several specific cash distributions to grandchildren (which have already been satisfied, so they’re no longer beneficiaries) and the residue is left equally to client’s three adult daughters.

It’s been some time since I reviewed the rules concerning trusts as bene’s, but is there anyway to get the 403(b) split into separate account treatment for the three bene’s or am I stuck taking a lump sum distribution payable to the trust, which may be a tax disadvantage? Or do we take distributions based on the oldest daughter’s life expectancy (participant was 92 years old so she was way past her RBD)?

Thanks in advance for any help or guidance.

Robert J. Gilbreath (“Rob”), Esq.
Michigan



Submitted by mk foss on Wed, 2011-01-05 22:22

If the trust agreement specifies splitting the trust into a separate trust for each beneficiary, you should be able to have the plan transfered t 3 beneficiary IRAS – one for the trust for each daughter. If the trust agreement just splits income 3 wayss, you’d start with one beneficiary account for the trust and see what can be done to get it split. This could mean reforming the trust or just getting a court directive to distribute the funds to a beneficiary account for each daughter – just my suggestions there – I’m not a legal expert.

With the trust as the beneficiary the oldest child’s life expectancy is used even if the account is split.

If you are stuck with one account payable to a trust, the trust can make distributions to the 3 beneficiaries and avoid adverse income tax consequences.



Submitted by Rob Gilbreath on Tue, 2011-01-11 21:44

The trust agreement does split into three separate trusts so I think I’ll use the 3 beneficiary IRA method.

But.. question… can the beneficiaries use a Roth IRA instead? Or is this option not available when a trust is named as the beneficiary?

Thanks again in advance!

Rob Gilbreath



Submitted by Alan Spross on Wed, 2011-01-12 01:15

Rob,
Yes, an inherited Roth IRA for the trust is an option as long as the trust is qualified, and you indicated it was. RMDs would still be based on the life expectancy of the oldest trust beneficiary. If the trust so permits or can be terminated, then separate inherited Roth IRA accounts can be created for each trust beneficiary, but that would not change the RMD calculation.

While it would increase complexity, there is no reason why a portion of the inherited TIRA could be converted instead of all of it. The tax bill for the conversion may not be convenient for each beneficiary, but once the plan balance is transferred from the 403b to a TIRA, that portion can no longer be converted.



Submitted by Rob Gilbreath on Wed, 2011-01-12 16:10

Thanks Alan-

Can you further expalin your last paragraph? The amount of the entire 403(b) is only $30,000 ish and I assume that any tax hit by converting to a Roth IRA would be shared by all three bene’s, correct? Two bene’s are retired so it really won’t effect them from an income tax perspective.

I guess I just need a little more clarity on your final paragraph.

Thanks again!

Rob Gilbreath



Submitted by Rob Gilbreath on Wed, 2011-01-12 17:15

Another quick follow up.

I know we will have to use the LE of the oldest trust beneficiary for RMD purposes. Does this mean:

$100,000 balance in 403(b) / Oldest Bene life expectancy: 19.4 = $5,155 RMD for EACH IRA/ROTH IRA established for the three trust beneficiaries OR does each IRA/ROTH IRA established for the three trust beneficiaries take 1/3rd of the $5,155 RMD. Basically, do we take $5,155 from each IRA/ROTH IRA each year (or $15,465 total) OR is the RMD pro-rated over the three IRA’s!?!?

Thanks again.

Rob



Submitted by Alan Spross on Wed, 2011-01-12 20:55

Once the separate accounts are created, each beneficiary must take their own RMD, which would be 1/3 of the total RMD. The divisor is the same for each, but only applied to 1/3 the 12/31 balance because only 1/3 will go to each separate account. Conversely, if separate accounts cannot be created and the inherited TIRA or Roth IRA is paid to the trust, then the entire RMD based on the full balance is paid to the trust which will then split it by beneficiary. The actual RMD is the same either way, ie 5,155 in total or 1,718 per beneficiary.

Re prior last paragraph, if one of the beneficiaries wanted their share converted it would not be fair for the others to pay any of the conversion tax. The conversion tax liability would be passed through the trust to the beneficiary that wanted their share converted and they would have to pay the tax on their 1040. If the type of trust required the trust to pay the conversion tax, then it should come out of the share of the beneficiary whose share was converted. As indicated, customizing each beneficiary’s decision will add complexity and accounting requirements to be equitable. May not be worth the trouble if each share in only 10k.



Submitted by Bruce Steiner on Wed, 2011-01-12 21:01

It isn’t worth all this complexity for $30,000. Why not just name each child as the beneficiary of 1/3 of the benefits? Why run them through a trust that’s going to end anyway?



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