IRA Beneficiary Trust

Submitted by Mark Nardelli on Tue, 2018-12-04 21:29

Lengthy but you’ll need the detail:
1. 48 years old single person purchases an annuity as an IRA in 2010
2. In the same year, 2010, they convert to a Roth IRA and pay any tax due from NQ funds
3. The family trust was later named as the beneficiary
4. The owner/annuitant dies from an accident in 2018 at age 54 *** (beyond 5 years but before 59 1/2)***
5. The trustee of the trust moves the money within 3 months to a new bank account in the name of the trust
6. The age, if it matters, of the trustee who was also the primary beneficiary of the trust is age 74

Questions:
a. Should the carrier treat this as an inherited Roth IRA? ***(it was originally converted from an IRA)***
b. If so, would they notify the IRS as a non taxable rollover or leave it up to the trustee to show it was a rollover?
b. If not, then how should it be designated?
c. If it’s a still a Roth IRA is there any RMD?
d. If an RMD is required by the primary beneficiary, when must the 1st RMD be taken?

Notes: The 5 year rule on converting says: must hold 5 years of 59 1/2 whichever is later. However, I believe there’s an exception for death which avoids any penalties for distribution.



Submitted by Alan - IRA critic on Wed, 2018-12-05 00:15

  • Please clarify 5).  An insurance company was the annuity issuer and Roth custodian. Was the inherited Roth IRA annuity surrendered and directly transferred to a bank as the new inherited Roth custodian?  
  • This was an inherited Roth IRA annuity at death and the Roth was qualified at that time.
  • An inherited Roth IRA cannot be rolled over, it can only be moved to a new custodian by a non reportable direct trustee transfer. Sounds like the bank is the new inherited Roth custodian. If a 1099R is issued in January, there was a distribution, but as a Roth it is not taxable.
  • An inherited Roth IRA with a trust beneficiary can take life expectancy RMDs based on the oldest trust beneficiary if the trust is qualified for look through treatment. The first RMD is for 2019 and must be distributed by 12/31/2018.  If the trust is NOT qualified, the 5 year rule applies and there is no annual RMD but the entire Roth must be drained no later than 12/31/2023. 
  • You are correct. The owner’s death erases all penalties for distributing a conversion in under 5 years, and the 5 year holding period for the Roth itself to be qualified has been completed. The Roth IRA is therefore qualified and tax free, but the trust may not necessarily be qualified. That is a separate issue and affects beneficiary RMDs.

Submitted by Mark Nardelli on Wed, 2018-12-05 20:44

5. Clarified:   >>> (a)  The insurance carrier sent a hard check to the trustee of the trust who deposited the check in a bank as a Roth IRA. They did not want to leave as an annuity and may rollver to a brokerage account at some point.  If applicable, it’s been longer than 60 days as I”m not sure the bank would have actually accepted the account as a custodian of a Roth IRA. >>> (b)   What constitutes a trust being qualified? This trust was already established as an living trust. >>> (c)   According to the annuity carrier, it will be reported as a non-taxable distribution but I have nothing other that a phone call stating that. They first sent a check with Fed & State taxes withheld. After dicussing this “error” they sent the full amount without witholdings. >>> [Your Point (4)]  If RMD’s apply … You stated the 1st RMD must be taken in 2019 BUT continued to say it must be distributed by 12/31/2018. Did you mean 12/31/2019 if the 1st distribution must be in 2019? Again if this ends up meeting the inherited RMD qualifications. >>> (d)   If this does not initially qualify, can it become qualified?    *** NOTE: I appreciate the fast response to this initial posting, thank you.   ****** NOTE: As finalizing this addition I noticed the comment from the insurance carrier I referrenced above regarding the statement that they are going to report this as a  “non taxable distribution” since is was a Roth IRA, therefore, there’s no real need to retain the funds as an “inherrited Roth” since those distributions are not taxable. The advantage being lost is that future growth would be “taxable” upon withdraw. AM I CORRECT ???

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