Roth IRA Trust expenses
A key ruling in PLR 200537044 was it supposedly clarified that the payment of trust expenses from a retirement plan distribution would not cause a conduit trust to be deemed an accumulation trust. Under this PLR, trust expenses were to be first deducted from retirement asset withdrawals before they were distributed to the trust beneficiary.
1(a). My concern: For a funded Roth IRA Trust having a grandchild as a “pass-through” beneficiary, suppose that the RMD for the grandchild is NOT sufficient to pay trust expenses. For example, the grandchild may be very young, and the RMD may be less than the trust expenses particularly during the beneficiary’s early years.
1(b). My question: May the Trustee aggregate both (a) the RMD plus (b) trust expenses to compute the annual withdrawal? If so, are there any tax consequences?
2. Are there later PLRs that clarify this issue?
3. May the annual trustee fees be paid from outside the Roth IRA Trust?
Permalink Submitted by mk foss on Tue, 2012-01-17 01:52
The Required Minumum Distribution is just that – a minimum. There is no difficulty if larger payments are withdrawn from the IRA. So for your questions 1(a) and 1(b) there should be no problem if additional funds are withdrawn to meet expenes. You might want to check the trust agreement to see if anything there would cause a problem, but the IRS will not have a problem with enhanced withdrawals.
There are no PLRs that explain that it’s OK to take more than the miniumum. Taking less than the minimum is the only time the IRS imposes penalties.
There are rulings that indicate that the payment of fees from outside an IRA are not considered IRA contributions. This same rule should apply for a Roth IRA. The question of whether the payment of those fees is tax deductible is not as clear. One can claim a tax deduction for an expense if they are required to pay it. The trustee of the trust may or may not be required to pay trust expenses; probably the fee would not be deductible if paid by the trustee. Payment by the beneficiary also might not yield a tax deduction. If the fees are signigicant, a PLR or more research would be in order.
Permalink Submitted by Bruce Steiner on Tue, 2012-01-17 03:46
PLR 200537044 involves an unnecessarily complicated plan. Conduit trusts rarely if ever make sense. If the beneficiary lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust. All of the assets, which would have been kept out of the beneficiary’s estate and protected against the beneficiary’s creditors, including spouses, will be thrown into the beneficiary’s estate, and will be exposed to the beneficiary’s creditors, including spouses.
There was no need to create a plan (as in PLR 200537044) that required someone to do something post-death to have the IRA benefits payable to a discretionary trust rather than a conduit trust.
I don’t know why anyone ever thought there was any issue with a trust that is a beneficiary of IRA benefits paying its expenses. A trustee is entitled to receive commissions (compensation) for acting as trustee (though sometimes a family member will waive commissions). A trustee who is not familiar with preparing income tax returns will have to pay someone to prepare the income tax returns for the trust. A trustee might hire an investment advisor, and pay fees to the investment advisor. A trust that is a beneficiary of an IRA will have these expenses to the same extent as a trust that is not the beneficiary of an IRA.
If the expenses exceed the required distributions, the trustees can take more than the required distributions.
While a living IRA owner can pay certain IRA expenses out of other money, I am not aware of any authority that would (or would not) permit a beneficiary of a trust that is the beneficiary of IRA benefits to pay the trust’s expenses out of other assets. I agree with Mary Kay that if you’re unable to find any authority either way, this might be a good subject for a ruling after the IRA owner dies.