IRA Trust
My client has named a “Conduit Trust” as her IRA beneficiary. The trust states that two trusts are to be established for each of her daughters. Each is to receive annual income based on their respective RMD life expectancy. Any undistributed amount at the end of their life goes into a grandchildrens trust.
1. Does the IRA desigated beneficiary form with the brokerage need to designate each child’s sub trust account (daughter 1 & daughter 2) 50% primary beneficiaries in order to get the RMD’s spread out over their respective lifetime? It currently just names the Conduit Trust which I assume would require the RMD’s to be based on the eldest beneficiary.
2. If trust accounting is required, can the trust pay the accounting cost directly?
Thanks,
Mary
Permalink Submitted by mk foss on Fri, 2012-02-24 01:18
The beneficiary designation would have to list each trust as a 50% beneficiary in order that they both use their own life expectancy. THen the IRA would be split into two beneficiary IRAs – one for each trust.
Will there be other assets in the trusts? If so, the trust accounting will be a little more complicated Does the trust agreement define the RMD as trust income? A provision like that will also simplify any trust accounting. The IRS wants no accumulation in the trust which could conflict with the way state law treats an RMD. Although not spelled out anywhere it seems logical that the RMD could be used to pay ordinary and necessary trust expenses before being distributed to the beneficiary.
It is easier if you can name adult children directly as IRA beneficiaries but if you want to make certain that distributions are made over life expectancy instead of all at once or if you want to provide creditor protection or keep the funds away from a spouse, the trust is the route to accomplishing this.
Permalink Submitted by Bruce Steiner on Fri, 2012-02-24 03:36
A conduit trust rarely makes sense. If the daughter lives to life expectancy, which will happen 50% of the time, all of the IRA distributions will have been thrown into her estate, and will be subject to her creditors, including spouses. For more on this, see my article on this subject in the March 2004 issue of the Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .
Permalink Submitted by [email protected] on Mon, 2012-02-27 06:48
Thank you for your responses. The RMD must be passed to the beneficiaries once the subtrusts are established.
I have four more questions:
1. Can each subtrust use the same trust tax ID number or do they have to have their own?
2. Can we file one 1041 with two k-1s?
3. Has anyone used a conduit trust with Schwab? Do they recognize subtrusts as beneficiaries? Do they require one tax ID number or one for each subtrust?
Thanks … Mary
Permalink Submitted by mk foss on Mon, 2012-02-27 18:52
If subtrusts are established, they should each have their own ID number and file their own return.
Some trusts have provisions for a “separate share” for each beneficiary. If there is just one trust, then you can file everything on one Form 1041 and attach Schedule K-1 for each beneficiary.
Schwab has a lot of IRA business, I would think they would have no problem with the subtrusts if the trust agreement provides for them and you have separate ID numbers for them. The title of the account would have to indicate the original owner’s name and the beneficiary trust’s name.