Trust RMD’s – Custodian information
Hello,
According to Pershing, if a non-individual (including certain trusts) is named as a beneficiary of a retirement account, RMD’s are required as follows:
A. If death of the account owner is before his/her required beginning date, either in a lump sum or over 5 years.
B. If death of the account owner is after his/her required beginning date, either in a lump sum or over the life expectancy based upon the account owner in the year of the account owner’s death and reduced by one year (continuing to be reduced by one year each year using the nonrecalculation method).
It is my understanding that a trust that qualifies as a see-through trust (either a conduit or discretionary trust) enables the RMD’s to be stretched out over the life expectancy of the oldest beneficiary – provided all requirements are met. Accordingly, is Pershing simply incorrect regarding “A” above (in terms of death occurring before the RBD)? Also, I just want to confirm that “B ” above is correct (regarding death occurring after the RBD)?
Finally, to the extent a trust is established on a testamentary basis as a contingent IRA beneficiary but is referred in the Last Will or Revocable Living Trust (as opposed to a stand-alone trust being created today), should we send the custodian a rider specifying that the contingent beneficiary is something along the following: Joe Smith, pursuant to Section 4 of Article VI of the 03/06/13 Last Will/Revocable Living Trust of Jan Smith? Would it be preferrable to have a stand-alone trust created on an intervivos basis rather than referenced in the Last Will/Rev. Living Trust?
Thank you.
Jason
Permalink Submitted by Bruce Steiner on Thu, 2013-03-07 19:25
Pershing is correct. If you don’t name an individual, or a trust that meets certain requirements, you’re limited to the 5-year rule, or the IRA owner’s remaining life expectancy as if he/she hadn’t died.If you name a trust, you would want it to meet the requirements to permit the stretchout over the life expectancy of the oldest beneficiary.Whether to put the trust(s) that receive the IRA benefits in the Will, or in a separate document, is a matter of style. I generally prefer to include the trust(s) that receive the IRA benefits in the Will, to avoid having to create additional documents, and to be sure that the terms of the trusts are identical (except for the special provisions needed for trusts that receive IRA benefits).Conduit trusts rarely 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 IRA benefits, which could have been kept out of the beneficiary’s estate and protected against creditors and spouses, will be thrown into the beneficiary’s estate, and will be exposed to creditors and spouses.While there are cases where living trusts are appropriate, they are overhyped and oversold, and for most people, except in some states, are unnecessary and serve as a distraction.You don’t want to refer to the date of the Will, in case the IRA owner subsequently changes his/her Will.For more on trusts as beneficiaries of retirement benefits, see my article on that 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 Jason Hochstadt on Fri, 2013-03-08 22:08
Hi Bruce,Thanks for the reply. Where can I find something applicable which stiuplates that see-through trusts which meet the necessary qualifications may be stretched out over the oldest beneficiary’s life expectancy? I understand your comment regarding not referencing the Last Will or Rev. Living Trust in the IRA Beneficiary Document. So, in your example where you incorporate the Accumulation Trust within the Last Will, typically how will this get titled at the IRA custodian on their beneficiary designation form?Are the only downsides with the accumulation trust (1) having trust income taxed at trust tax rates (which hits the highest marginal rate at around $12k of income) and (2) needing to have adequate trustees and successors who would be willing to provide distributions to the beneficiary as necessary (since they have complete discretion). Thank you. Jason
Permalink Submitted by Bruce Steiner on Sun, 2013-03-10 00:54
You can find something applicable in my article. There is a link to it in my previous resopnse. The beneficiary designation would refer to the trusts created under the Will, but not the date of the Will, in case you sign a subsequent Will. Each financial institution has its own way of showing the title of the inherited IRA.If appropriate, you could give the beneficiary, or someone else, the power to remove and replace the trustees (provided the replacement is not a close relative or subordinate employee).
Permalink Submitted by Jason Hochstadt on Tue, 2013-03-12 22:03
Hi Bruce, Thanks for the reply. I just want to confirm that if an account owner passes away subsequent to having begun his first RMD, that any beneficiaries (other than a spouse who can do a rollover) would need to take RMD’s according to the schedule being taken by the account owner – versus if he passed away prior to his required beginning date, a younger beneficiary (or trust with a younger beneficiary) would be able to use the longer life expectancy per the Single Life Table for Inherited IRAs.
Permalink Submitted by Alan - IRA critic on Tue, 2013-03-12 23:17
That is correct. A non qualified trust would use the remaining non recalculated life expectancy of the deceased IRA owner for RMDs. Even a qualified trust that included a beneficiary older than the decedent could use the decedent’s life expectancy. But this won’t work for an inherited Roth IRA since the Roth owner is always deemed to pass PRIOR TO the RBD (as there is no RBD for a Roth). For a Roth, a non qualified trust would trigger the 5 year rule.
Permalink Submitted by Premchand Gada on Sun, 2014-03-16 03:44
What are the consequences?Let us say Separate Beneficiary designated Accumulation (Stretch) Roth Trusts are opened after the death of owner for grandchildren where every grand children can use their own age to determine RMD to be paid out for lifetime payout: Now say if instruction to Accumulation trust is to retain partial RMD (say 25%) and pay 75% to beneficiary. What are consequences about penalty, tax liability of grand child for RMD and who pays the penalty? Or what are other consequences?
Permalink Submitted by Premchand Gada on Sun, 2014-03-16 03:45
If there is instruction to terminate Accumulation trust at age 35 of the grandchild, what happens to RMD after 35? Does he/she continues to get RMD as the scheduled RMD like before or has to take five year payments or lump sum payment? What are Tax/penalty consequences?