Family Trust as IRA Beneficiary
A 48 year old divorced woman passed away in February 2018. She has two children, age 17 and 20. She did not name a beneficiary on her IRA and Schwab does not offer a default beneficiary. The court recently approved the naming of her ex-husband’s Family Trust to be the beneficiary of the IRA. The trust was created in 1999 and she was the trustee and beneficiary of the Family Trust, and now her sister has been named trustee of the Family Trust.
Questions: Do RMDs need to be distributed within 5 years of death in this case, regardless of whether or not the Family Trust qualifies as a See Through Trust (so the stretch would not be possible)? If so, are the distributions given to the successor beneficiaries of the Family Trust, which in this case would be her two minor children? If so, how do we handle those distributions since the children are not yet 21 years old?
Any guidance is greatly appreciated!
Permalink Submitted by Alan - IRA critic on Wed, 2019-06-12 19:52
I think you meant that the Schwab agreement does not specify a default beneficiary other than the estate. Did she have a pour over will transferring the IRA to this trust? In any event since the trust was not named on the IRA agrement as beneficiary, it is not qualified for look through and the 5 year rule applies. If distributions are made to the trust, they can be passed through to the trust beneficiaries or accumulated in the trust subject to the trust provisions. While trust tax rates are high, the alternative kiddie taxes could be just as bad. Due to their ages, the 20 year old has probably reached the age of majority and perhaps the distribution dates should be set up differently from the 17 year old minor, not delayed as long. State law would probably result in any distributions made to a minor be made to an UTMA account. Due to the several variables, if this account is large enough, the trustee should consider professional tax advise since the 5 year rule is very flexible as to scheduling IRA Distributions.
Permalink Submitted by Jonathan Sard on Wed, 2019-06-12 21:11
The account owner passed away without a will. If distributions are made to the children through the trust, do the children pay the tax at their individual tax rate? I am not sure when the trust tax rates come into play? However, the current trustee is trying to protect the assets from one of the children due to his mental instability and fear of spending all the money very quickly. So, I guess in that case, the distributions should go into the trust where the trustee will have more control over the dollars? Will there need to be two trust accounts set up in order to track each child’s 50% share? Thanks again!