Beneficiary IRA accounts for 4 trust beneficiaries?

Submitted by James Kealing on Tue, 2015-03-24 23:25

I have an elderly client who recently passed away at the age of 92 who owned a $100,000 IRA. She named her living trust as beneficiary of her IRA and her 4 living kids are the individual named beneficiaries of her living trust which became irrevocable at her death. I understand the MRD for the trust will be based on the age of the oldest child beneficiary of the trust, it’s pretty clear that the trust is a “look through” trust for Treasury Regs and Publication 590-B purposes, and the trustee by terms of the trust has broad powers to make elections, minimize taxes for the beneficiaries, etc. In fact, this lady client should have probably named the 4 kids as 25% individual beneficiaries but her attorney set up this living trust as the beneficiary. My questions are…

1) Does anyone know if the 4 kids can set up beneficiary IRAs to receive their 25% share of the IRA directly and take annual distributions based on the age of the oldest beneficiary?

2) How do the beneficiary IRAs receive the assets from the IRA owned by the now testamentary trust….by direct transfer form signed by the trustee, by letter of instruction from the trustee, or some other paperwork process?

3) Does this transfer have to go through the setup of a trust beneficiary IRA account to pass the assets to the beneficiary IRAs, and if so, how does one handle the tax reporting?

Any help and other comments would be greatly appreciated.

Thanks,
Jim



Submitted by Alan - IRA critic on Wed, 2015-03-25 00:17

  1.  Only if the trust provisions allow it to be terminated or allow the trustee to make that decision.
  2. If the trust is terminated, the trustee will have to provide whatever documentation the IRA custodian requires to allow them to establish inherited IRAs. If any of the children is exposed to creditor problems, their share should be kept in the trust.
  3. Not sure if transfer out of the trust must be reported on the trust 1041 or not, but the beneficiaries thereafter will get individual 1099R forms for IRA distributions instead of K 1 from the trust. As you indicated, creation of separate inherited IRA accounts will not change the amount of the RMD, but will provide each beneficiary more direct control of their interest in the IRA.


Submitted by James Kealing on Wed, 2015-03-25 01:20

The problem I am having is with the firm that holds the assets. They are saying that the trust must set up an IRA account to receive the MRD, and that the beneficaries cannot do separate beneficiary IRA accounts.  There is no real guidance anywhere in writing that I can find as to how to do the paperwork to take the first year MRD and future MRDs from a practical standpoint.  In essence, having 4 named beneficiaries of the IRA or the conduit trust seems in substance the same thing except for the factor for determining the MRD in each case, but the firm holding assets says the trust has to receive the distributions and do the tax reporting etc., and that just doesn’t make sense to me.  What I am really asking is that since the trust gives the trustee broad powers to pretty much do what she wants, can’t she just terminate the trust and require the distribution be paid to 4 beneficiary IRAs, and then have them do their MRD following the year of death in each IRA account?  All of the 4 kids have already set up their own beneficiary IRAs anyway with no problem.  This may be what you are telling me to do, but I am not understanding it all.  Thanks again. 



Submitted by Alan - IRA critic on Wed, 2015-03-25 02:52

Has the trust been submitted to the IRA custodian? This is part of the qualification process. Perhaps the custodian does not feel that the trustee has the authority to terminate the trust. If the trustee believes otherwise, in some cases where the IRA custodian is being uncooperative, the IRA must be transferred to another custodian. If the kids have already set up beneficiary IRAs it appears that all parties but the custodian assumed this was going to happen. Much of a custodian’s actions in a case like this are geared to avoiding litigation in the event there is a dispute over termination of the trust. Trustee should find out exactly why the custodian thinks that the trustee does not have the power to terminate this trust.



Submitted by [email protected] on Wed, 2015-03-25 13:27

Alan,If the trust has the disretion to pay out to the trust beneficiaries and chooses not to, what are the tax ramifications?  For example, Beneficial IRA pays RMD to trust.  Trust keeps it.  This is considered taxable income to the trust.  Then, in the future the trust pays out to the beneficiaries.  How is that payment taxed?  Is there a consideration of “basis”, or distribution of already taxed amounts, that the bene would not owe taxes on?  Perhaps only on the earnings since the trust recevied the original distribution?Thanks, -m



Submitted by James Kealing on Wed, 2015-03-25 16:00

Thank you for your answers.



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