Trust as IRA Beneficiary – Optimizing
I have a revocable trust with 3 young adult children as successor beneficiaries.
An extended family member has an IRA with my trust as beneficiary (as a means of
leaving to me and then to the 3 others at my discretion or following me).
Altho I don’t foresee needing the inherited IRA myself, and so I can keep it
ideally as a long-term safety net for the 3 successors, it might nevertheless
be useful to keep some flexibility.
Also at the same time, I would naturally like to stretch any inherited IRA RMD
schedule, so it would of course be best to have the 3 adult children as successors
for the IRA but with the rules of the Trust to maintain the primary long-term
safety net focus.
I of course recognize any ideas would need to be eventually put in final form
by the lawyer. However, I’m trying to think a bit outside the box and don’t
want to overlook input from others’ experience and knowledge.
Is any of this feasible in total? For example,
1. I don’t believe there’s any way to have my revocable Trust as beneficiary and yet
allow me to disclaim any interest for myself – ie, so the Trust’s successor beneficiaries
would be immediately next in line? That of course would meet some of the ideal objectives.
2. If not, could I instead set up now what would eventually be decedent trusts – under my
existing Trust? If so, would that be one way to meet requirements for using the children’s
ages for RMD of the eventual inherited IRA, yet allowing the rules of my main trust to
still apply while avoiding a possible need to at this time set up completely new trusts (one obvious
alternative which brings several disadvantages)?
2.a) If so, could I then disclaim for myself and so the IRA defaults to the decedent
trusts? Or would that get too potentially muddled – if even feasible?
3. If #2 is possible, could I be the initial Trustee? Would taking any of the eventual
RMD for myself (the flexibility objective) be possible or would it need to be paid to
the children first? No principal would be taken other than for the (standard) needs of
the children / beneficiaries – never any paid to myself. (ie the RMD needs to be
distributed anyway to avoid being taxed within the trust – however distributed is likely
limited only to the beneficiaries?)
Thanks for any thoughts on these probably incompatible “ideal objectives”!
Permalink Submitted by Bruce Steiner on Mon, 2012-08-13 22:10
Your job is to decide what your objectives are. The lawyer’s job is to figure out how best to accomplish your objectives.
I think the revocable trust is the cause of some of the confusion and complexity.
It’s generally not a good idea to require that the trust pay out the required distributions from the IRA. Ifa child lives to life expectancy, which will happen 50% of the time, nothing will remain in the trust. All of the assets that could have been kept out of the child’s estate and protected against the child’s potential creditors (including spouses) will no longer be as well protected. If you make the children’s trusts discretionary, the trustees can consider income taxes, along with other factors, in deciding whether to distribute or accumulate the IRA distributions.
If you disclaim, you can’t participate in discretionary distributions, as a trustee or otherwise, except as limited by an ascertainable standard.
For more on trusts as beneficiaries of retirement benefits, see my article on this 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 W Dobroski on Tue, 2012-08-14 01:15
Thanks for your helpful thoughts.
However, in my specific situation, I actually do want the non-Roth IRA RMDs to be distributed – both to provide some modest income benefit to the beneficiaries as well as to spread the tax impact for the recipients (and avoid Trust tax rates). An additional objective (for various reasons) met in this approach is to eliminate most discretion except for well defined exceptions for need.
Yet it would be ideal if I could also somehow retain some limited access for myself (e.g. as I had hoped via RMD access but which however, as I feared, sounds impractical), while however establishing the adult children age RMD for the IRA.
But as I suspected, it sounds like those objectives are not feasible in sum?
Permalink Submitted by Bruce Steiner on Tue, 2012-08-14 02:02
The lawyer should discourage you from requiring distributions. No one knows what the future will bring. If distributions are discretionary, the trustees can make distributions if that makes sense, but can accumulate if that makes more sense. A child might have a creditor problem, or get divorced (gifts and inheritances are not subject to equitable distribution in most states, but they are in some states, and in any event the child might commingle the money), or outlive his/her spouse and remarry, or have a taxable estate.