Passing On ROTH IRA’s Directly Vrs. In Trust

Submitted by Herm Brames on Mon, 2013-09-23 16:40

I have read a number of Alan and Bruce’s posts in the past re the establishment of Trusts, (including Bruce’s article in the March 2004 issue of BNA Tax Management Estates), to receive, protect, and extend the life of inherited IRA’s, specifically ROTH IRA’s for children beneficiaries. I have several questions I don’t find answered in those posts.

1. May a surviving parent with 2 children designate their ROTH IRA’s to be inherited
1 half directly to one child as a designated beneficiary and 1 half to a Trust for
the second child? If the answer is YES, even if there are other non-IRA assets
that will pass through Probate equally to the two children? (There may be good
reason for the child receiving ROTH assets over their lifetime under Trust but yet
having access to fairly immediate cash for something such as a major home
renovation etc.)
2. Is there a generally accepted amount which would make the establishment of a Trust
to receive ROTH assets warranted?
3. Who, (banks, brokerage firms, attorneys, friends/relatives etc.) is typically
recommended for Trust Administration and why?
4. Although I understand that Trust Administration fees recommended may vary from
State to State but is there a generally accepted average fee on would expect to pay
and is that fee typically negotiable?

Thanks



Submitted by Alan - IRA critic on Mon, 2013-09-23 18:35

  • 1) You could name a trust as beneficiary for a share of your Roth IRA and name another beneficiary for the remaining share. If you do that, it is critical to make sure separate inherited IRA accounts are set up by the deadline. If there is any doubt about that happening, consider partitioning the Roth IRA into two accounts with one child as beneficiary of one and the trust for the other. If there is a reason to use a trust beneficiary for one child, perhaps the child’s other assets should also be left in trust.
  • 2) Best for Bruce to respond to this, but it probably depends on the situation. Some beneficiaries should not be left anything directly if they can’t make rational decisions.
  • 3) Good question. A competent family member can make a better trustee than a bank, but there are probably too many less than competent family trustees in place because people want to avoid the impersonal treatment and costs of a professional trustee. For other than competent and willing family member trustees, the friend or family member should be avoided for the downside risks they present.
  • 4) Bruce should respond here. The assets held in trust would be a factor, eg a business interest would be more work intensive. Also remember that there will probably be a 1041 filing requirement every year and the prep fees for those are typically higher than for individual returns.

Submitted by Bruce Steiner on Mon, 2013-09-23 22:41

  • 1) Yes, though if you’re giving one child the benefit of a trust, you might want to give the other one the benefit of a trust as well.
  • 2) Different people have different views of how much is sufficient to warrant administering a trust.  I agree with Alan that it may depend on the situation, and the degree to which asset protection is a concern.
  • 3) Any one or more individuals and/or a bank or trust company can act as trustees.  Some clients have suitable family members or other individuals.  It depends on the situation.
  • 4) Some states, such as New York, have a statutory schedule of trustees’ commissions (fees).  Other states allow reasonable compensation (which means that if the trustees and beneficiaries can’t agree, the court will decide).  Banks and trust companies have their own schedules.  Family members often don’t take commissions unless there’s a tax reason for taking commissions.  A bank or trust company will usually charge about 1%, a little more on a small trust and less on a large trust.

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