Roth IRA RMD
As a Roth IRA owner/depositor, upon my death, I know that I can limit a beneficiary to only the RMD using a “Roth IRA Trust” as a pass-through vehicle. But can the Roth IRA Trust approach be avoided by adding appropriate language to Article IX of Form 5305-RA — e.g., “a beneficiary is limited to only the RMD each year”? (Obviously, my intent is to ensure that any beneficiary “stretches” the Roth IRA over his/her expected lifetime).
Permalink Submitted by Alan Spross on Thu, 2011-06-30 01:25
You won’t be able to find an IRA custodian that will accept such a provision on their beneficiary form because they do not want to get involved with limiting distributions to beneficiaries. Other than an irrevocable trust, you can locate some large IRA custodians that offer a “trusteed IRA” agreement (perhaps what you were referring to) which combines the IRA with a trust format that only covers the IRA funds. You would save the cost of an estate attorney drafting a full independent trust, but there would still be some fees for the trustee to control the distributions and limit them to RMDs only.
Many IRA custodians do not even want to include survival periods in their beneficiary clauses, even though these periods are usually limited to 60 days or less.
Permalink Submitted by Bruce Steiner on Thu, 2011-06-30 02:56
For the reasons not to create the trusteed IRA that Alan referred to, see my article on that subject in the September 2009 issue of Trusts & Estates: http://www.kkwc.com/library_cat/uf_trusteed_IRA.pdf
It shouldn’t cost very much to create your own trust for the IRA benefits. The trust or trusts that receive the IRA benefits can be in your Will, or in a separate trust instrument. The key is to make sure that no one older that the person whose live you want to use as the measuring life for the stretchout can ever receive any of the distributions from the IRA that are accumulated in the trust. We routinely include these provisions in our Wills, so there’s very little cost to doing this.
Permalink Submitted by John Peoples on Fri, 2011-07-01 14:40
Thank you for your replies — which were quite helpful.
I surmise the language I suggested (“a beneficiary is limited … RMD each year”) is legally valid,
but a Custodian still would not accept the language because of the Custodian’s more involved role.
Permalink Submitted by Bruce Steiner on Fri, 2011-07-01 14:56
The IRA owner and the financial institution can can put anything they want in the Form 5305 or Form 5305-A they want, as long as it’s permissible under the Internal Revenue Code and state law.
Before the IRS issued the initial temporary regulations on required distributions in 1987, there was some question as to whether a retirement benefits could be payable to a trust without destroying the stretchout. In the case of qualified plans for closely-held corporations (where the trustees were more likely to accept it), we sometimes provided for the method of distribution in the beneficiary designation.
It might be possible to get a financial institution to accept this in an IRA. But even if you could get a financial institution to accept it, it would seem much simpler, and much more flexible, to leave the IRA to the beneficiary in trust rather than outright. That would give the trustees control over the investments, and the ability to distribute more than the required amount if there were ever a good reason (that you can’t foresee now) to do so. It would also keep the IRA out of the beneficiary’s estate for estate tax purposes, and better protect it against the beneficiary’s potential creditors (including spouses). It would also allow the trustees to make distributions to the beneficiary’s children if there should be a reason to do so.
For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .
Permalink Submitted by John Peoples on Fri, 2011-07-01 16:53
To bsteiner:
Yes, I agree that a conduit trust or an accumulation trust (or the hybrid “switch-between-the-two one time”) is a better arrangement [u]in theory[/u]. However, in practice, there are to be six beneficiaries, namely, two children and four grandchildren, and I have been advised that it would be best to have six individual trusts because of, at least, the disparity in ages and the beneficiary lineage. Every trustee I have contacted would charge six separate trustee fees, such as: a minimum base fee, a fee on interest earned, a management fee, a draw-down fee… (need I go on). These fees would be withdrawn from the Roth IRA along with the RMD. The annual trustee fees could amount to 4-5% per year on the IRA corpus. (In this investment environment, this would basically “kill” the stretch out opportunity because there would be limited growth.) My thought was that a Custodian, who typpically charges $50-$100 per year on an IRA account and who has agreed to compute and distribute the RMD for this fee as well, could be instructed to only pay out the RMD and no more. This way the IRA is not dissipated by large trustee fees.
My present position is that I will forego the ability to limit the withdrawal to RMDs so as to save large (exhorbitant) trustee fees.
Permalink Submitted by Bruce Steiner on Fri, 2011-07-01 17:03
A conduit trust won’t make sense very often. If the beneficiary lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust.
I’m familiar with the one-time switch from conduit trust to discretionary trust. I think the fact pattern in the ruling was far more complicated than necessary. But I don’t think that form of trust will make sense very often. In almost all cases, a discretionary trust will be preferable to a conduit trust, so I don’t see why it would make sense to start out with a conduit trust and require that action be taken post-mortem to change it to a discretionary trust.
A corporate trustee’s fees are usually about 1%, a bit higher on small trusts, and less on large trusts. If the minimum fee works out to 4%, the trust is far too small for a corporate trustee (unless the one you spoke with requires a very large minimum fee). If the trusts are too small for a corporate trustee, you might want to consider family members as trustees, perhaps each grandchild’s parents as trustees for the grandchild.
There is, of course, some amount that’s too small for a trust even with family members as trustees. In those cases, we have the IRA go outright (with a custodian for anyone under the age to which custodianships can run).