dist from trust in annuity pay 10% penalty
Father passed away and left large sum to daughter who is 20.
It was 560k
a. inherited ira (is under trust) i know she must take dist based on her age 1 year after death and it doesn;t matter that the father was only in his 50’s. no penalty for dist.
b. we are funding a whole life policy (under trust) with 200k.
c. we are funding an annuity (under trust) with a 100k, but if she needs income or a distribution from the annuity; this is to have tax deferral so the trust doesn’t pay a large amount of taxes on earned income.
questions:
1. will she have to pay the 10% penalty since she is under 59 1/2?
2. does the income become taxable to her or the trust?
Thank you,
Douglas
Permalink Submitted by Alan Spross on Thu, 2012-10-18 18:53
1) No penalty if the inherited IRA is transferred into an inherited IRA annuity. The inherited IRA already requires annuity like RMDs, only around 2% of value per year assuming the beneficiary is in her 30s. In addition, there is an unlimited option to exceed the RMD amounts by any amount. If the trust took a large IRA distribution to purchase a non qualified annuity, taxes would be accelerated.
2) The trust provisions should state what is done with the RMDs or other income, ie retained in the trust (taxed at higher rates) or passed through to the beneficiary on a K1 and taxed on the beneficiary’s return.
Permalink Submitted by Douglas Bauerband on Thu, 2012-10-18 23:02
Sorry Alan, i guess i stated it wrong;
the ira and annuity are seperate items.
IRA was for 36k and we transferred into an inherited ira. Daughter who is 20 will take her rmd next year based on the tables slott provided.
560k was from a life policy with benef as trust.
out of the 560 we moved 200k for a whole life on the duaghter under the trust.
to save on taxes with the trust we moved 100k into an anuuity under the trust.
question:
if the daughter needed money out of the annuity trust;
a. does the daughter or the trust get hit with the 10% penalty for withdrawals prior to age 50 1/2?
b. does the trust pay the income tax on the withdrawal or the daughter?
Thank you,
Douglas
Permalink Submitted by Alan Spross on Fri, 2012-10-19 00:13
Douglas,
Quoted from the Journal of Financial Services Professionals, May 2010:
[quote]Generally, if annuity withdrawals are made and not distributed in the same taxable year to the beneficiaries of a complex trust, then gains to
the extent of withdrawals would be taxable to the trust under the tax rules for complex trusts of IRC Section 662. The 10% penalty tax on
taxable withdrawals should be payable on any amounts retained by the trust unless an exception under IRC Section 72(q)(2) applies. Even if
the trust beneficiaries are older than age 59½, the 72(q)(2) exception for premature distributions would not appear to apply to annuity
distributions retained by the trust.38 However, if the complex trust distributes the amounts withdrawn from the annuity before the end of the
trust’s taxable year, then the IRC Section 72(q)(2) exception to the 10% penalty tax on taxable withdrawals should apply if the trust
beneficiary who receives the distribution is over age 59½.[/quote]
If the trust is a simple trust, then the penalty will only apply if taxable annuity income is distributed to the trust beneficiary who is under 59.5.
Presumably, the trust would qualify for treatment of the annuity as a natural person owner, and that would preserve income deferral as if the beneficiary purchased the annuity and not the trust. Of course, annuity distributions would still be considered to come from annuity earnings before principal, and the 10% penalty is addressed above.
Whether the trust is a simple or complex trust depends on the trust provisions, ie whether the trust retains the income and pays at the higher trust rates or passes all income through to the beneficiary.
Permalink Submitted by Douglas Bauerband on Fri, 2012-10-19 00:31
THE TRUST IS LISTED AS:
A.T. REV TRUST, EXECUTOR M.B. FBO, S.T. DATED 9-27-07.
HOW DO YOU KNOW IF ITS A SIMPLE OR COMPLEX?
THIS IS THE STATMENT THAT I SHOULD LOOK FOR IN THE TRUST….”whether the trust retains the income and pays at the higher trust rates or passes all income through to the beneficiary”
Permalink Submitted by Douglas Bauerband on Tue, 2012-10-23 15:31
the trust states to pass “so much of net income” to daughter from time to time as is needed.
when she is 23, the trust states to pass “all the net income” to the daughter quarterly.
question:
a. so if we pass the income from the annuity to the daughter (we dont have to…leaving other sources to give her income), she will get hit with the 10% penalty, correct?
b. the daughter would then pay the taxes at her rate from the annuity distribution and not at the higher rate of the trust..correct?
Thank you,
Douglas