Living Trust as bene of 401k
Client dies at 65 and leaves substantial 401k to living trust. Trust benes are 23 year old son-75%, and ex-wife-25%. Sole trustee is ex-wife. Trust language states that until age 30 trustee can grant son $ for health, education, support & maintenance. At age 25 he can access 50% of trust principal, at 30 he gets 100%. Can trustee authorize the 401k (which is now owned by the Living Trust) to pay out the 401k proceeds to inherited IRAs, one for her and one for the son? If so, is the RMD based upon each bene’s respective age or the oldest bene’s age? And if allowed to pay the 401k proceeds to inherited IRAs, I assume that they must they be trustee to trustee transfers? I ask because I was brought into this case late, after the life insurance agent had directed the trustee to have the checks issued directly to the benes. Fortunately there was some paperwork that the life agent neglected to include, so everything has been delayed. Thank you.
Re Trust language-there is nothing in the language of the trust that explicitly states that the proceeds can/can’t be rolled into inherited IRAs. There is language that directs the trustee to take any action she deems necessary to minimize income or estate tax consequences.
Permalink Submitted by Alan - IRA critic on Tue, 2014-12-09 00:06
It appears that the trustee has the power to directly transfer the inherited 401k into an inherited IRA, also in the name of the trust. Two keys are whether the trust is qualified for look through treatment AND whether the client was married to anyone other than the beneficiary you describe as “ex wife” at the date of his death. What was the date of death?
Permalink Submitted by Charles Duncan on Tue, 2014-12-09 07:58
so assuming that the trust qualifies for look through treatment then each inherited IRA must be titled in the name of the trust, not in the names of the son and ex as bene for the decedent? And no, he was unmarried at the time of his death.
Permalink Submitted by Alan - IRA critic on Tue, 2014-12-09 17:19
The inherited IRA must be initially titled with the trust as beneficiary. Later, if the terms of the trust allow it to terminate, the trustee can assign each trust beneficiary’s share of the IRA to their own inherited IRAs. However, assignment will not change the future RMDs which must continue to be based on the age of the oldest trust beneficiary. The separate account rules that allow separate inherited IRAs to be established by the end of the year after death for individual designated beneficiaries do NOT apply to trusts or trust beneficiaries.
Permalink Submitted by Charles Duncan on Wed, 2014-12-10 18:45
Could we set up two inherited IRAs initially, w/ 25% to one titled “John Smith Trust, Mary Jones, Trustee, as beneficiary” and name ex-wife & trustee Mary Jones the bene and 75% to the other titled “John Smith Trust, Mary Jones, Trustee, as beneficiary” and name son Joe Smith as bene? Or does it initially need to be one inherited IRA, splitting AFTER it is determined that the trust allows the IRA to be split?I have a call into the attorney with whom I’ve worked in the past; assuming he tells me that trust language allows the IRA to be split do we atill have to roll into one inherited IRA first, then split, or can the money be rolled from the 401k into the two IRAs?Finally, from your last sentence I take it that you mean that if we do separate into two IRAs that it needs to be done by 12/31 of this year (2014)-correct?Thanks again for all your help.
Permalink Submitted by Alan - IRA critic on Wed, 2014-12-10 23:34
You could try. The trust info must be provided to the plan administrator by 10/31 of the year following the year of death in order for the trust to be treated as qualified. If the plan administrator can be convinced that the trustee has the power to split the trust into two sub trusts, they would agree to either a check for each beneficiary’s share to the respective inherited IRA custodian. If the plan does not agree, the trustee of the trust will have another chance to achieve the same thing with the inherited IRA custodian. There is no time limit to establish two inherited IRAs, but regardless of when this is done, the RMD (divisor) for both will be that of the oldest trust beneficiary. No separate accounts permitted for trusts just means that the RMD cannot be changed by setting up seperate accounts, but they can still be established anytime if the trust permits, with no affect on the RMD divisor.