What does the following language re: “trust income” mean?
“Any trust income that is not distributed by the trustee shall be accumulated and added to the principal.” Does this have any bearing or impact whatsoever to the “stretchability” of inherited IRAs in the trust? I vaguely recall reading once before that accumulation versus conduit trusts have differing outcomes with respect to stretching of inherited IRAs.
Permalink Submitted by Alan Spross on Mon, 2012-02-13 02:48
No bearing on the life expectancy used to determine the RMD from the IRA to the trust. That is determined by whether the trust is “qualified” for look through treatment or not.
Rather, the amount once received into the trust that is either accumulated in the trust or distributed out to trust beneficiaries can be affected by definitions of what is considered trust income vrs trust principal. The following includes a basic explanation:
http://www.investorsolutions.com/news/51/104/Naming-A-Trust-As-Beneficia…
Permalink Submitted by Bruce Steiner on Mon, 2012-02-13 04:07
It’s a routine provision in a discretionary trust. For example, suppose a trust begins with $1 million, and in year 1 it earns $30,000 of income and the trustees distribute $20,000. Assume no principal transactions. The trust now has $1 million of principal and $10,000 of undistributed income. If the undistributed income is added to principal, the trust now has $1,010,000 of principal. As a practical matter, it probably won’t make any difference, or any significant difference, whether the trustees add the undistribute income to principal.
It has nothing to do with the stretch.
A conduit trust is one that requires that all distributions from the IRA (regardless of whether they’re considered income or principal) be paid out to the beneficiaries on a current basis. While conduit trusts rarely make sense, one advantage of a conduit trust is that you can ignore any subsequent beneficiaries for purposes of determining the oldest beneficiary of the trust.
The reason conduit trusts rarely make sense is that if the beneficiary lives to life expectancy, nothing will be left in the trust. The assets will have been thrown into the beneficiary’s estate, and will be subject to the beneficiary’s creditors, including spouses.