Irrevocable trusts owning IRA’s
My client is the trustee of his mothers now irrevocable trust. The husband died 4 years ago and his IRA past to an irrevocable trust (yah I know, what were they thinking). this is a million $ IRA and I’d like to get my client in a better beneficiary situation while moving this trust to a beneficial IRA.
My client is the trustee and is willing to sign of on a change of ownership. We have attempted to have the custodian transfer it as a beneficial IRA but they will not as the registration is different. One option has come up which I am not all that comfortable with due to the potential tax issue. We could distribute the IRA to the trustee then roll it over to an IRA for the mother.
Will there be a tax issue if this is done in a timely manner but will change registrations.
Thanks
Brian
Permalink Submitted by Alan - IRA critic on Wed, 2014-09-03 20:37
Forget about distributing the IRA. That would be taxable, destroy the stretch, and a distribution from an inherited IRA can never be rolled over. The first thing to do is determine if the trust is qualified for look through treatment and the next is to determine if the provisions of the trust allow it to be terminated. Remember that the courts are in the process of eliminating any creditor protections for inherited IRAs (some states have passed legislation to protect inherited IRAs against this trend), so more people will be using trust beneficiaries than before. However, if the trust can be terminated, the trustee can have the IRA assigned directly to the trust beneficiaries. This will not change the RMD, but will result in each beneficiary to have their own inherited IRA, manage it indepentently, and eliminate filing a 1041 each year to report IRA RMDs as trust income. Here is more information on how to have the IRA assigned: http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Brian Solomon on Wed, 2014-09-03 23:42
Alan, Great information, thanks! Brian
Permalink Submitted by Bruce Steiner on Wed, 2014-09-03 21:58
Depending on the terms of the trust, it may be possible to get it to the surviving spouse so she can roll it over. See my article on this in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf. I’ve obtained some private letter rulings on this.