IRA’s in a trust

Submitted by Bruce Claassen on Thu, 2017-08-24 15:47

A complex trust was the beneficiary of several IRA’s of a decedent. The daughter of the decedent and several charities are the beneficiaries of the trust.
If the trust takes a distribution from an inherited IRA, does the taxable distribution count as “gross income” under Sec 642(c)(1)? If so, theoretically the Trust could satisfy the charities’ portion of the Trust inheritance with those funds and get a charitable deduction, correct?

If not, then it would seem the only way to maximize tax benefits would be to create inherited IRA’s for the daughter and charities that the original IRA’s would be liquidated into, and those inherited IRA’s would effectively be distributed to the beneficiaries. I’ve heard of this method, but the IRA custodians are being difficult and don’t want to do this. For that reason, I thought if the taxable IRA distribution would satisfy the gross income requirement, then we might be able to achieve the same result without the hassle of fighting with the custodians.



Submitted by Ben Meyer on Thu, 2017-08-24 18:38

Was the decedent receiving RMDs at the time of death?  That is, was the date of death on or after April 1 of the year following the year the decedent resched age 70 1/2?  That question has relevance for the alternatives available.  Also, was the charitable gift specified as a percentage or as a dollar amount?

Submitted by Kate Constantino on Wed, 2018-05-16 17:06

What if the answers to your questions are:1. No to RMDs; and 2. Percentage

Submitted by Ben Meyer on Thu, 2018-05-17 04:42

In the situation you described, The goal you seek can be achieved if a partial distribution can be taken before September 30 of the year following the year of the IRA owners death, and if the distribution is used to pay the charities the amounts they are due under the trust.  Making these payments will allow the trust to become a qualified trust with only natural persons as beneficiaries.  The trust document must then be sent to the IRA custodian by October 31 of the year following the death along with a statement that all remaining beneficiaries as of September 30 are natural persons.  The trust must also meet the other requirements for qualification.  The trust will then be able to offset the income from the IRA distribution with a charitable deduction.  Next, The IRA custodian should be asked to transfer the balance of the IRA to an inherited IRA for the trust beneficiary.  The beneficiary will then be able to take stretch distributions.  All of this requires the cooperation of the IRA custodian.  The best way to achieve the desired result would be to vet the plan with the IRA custodian during the lifetime of the IRA owner.  But even with that, the custodian may have changed its internal processing policies when the actual death occurs.  Also please note that this is only a high level description and omits several details.  Complexities may arise in trust accounting for administrative expenses and other areas.  Dependng on state law, the trust may be required to register as a charitable trust with a state agency that regulates charities.

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