Minor Beneficiary receiving RMDs
When investigating how numerous service providers would handle payouts of my Traditional IRA, Roth IRA, and life insurance to my minor grandchildren after my passing (after age 73) I am being told lots of different things from each of them.
Specifically, RMDs from my Traditional IRA MUST be paid out to a minor grandchild (regardless of age) while a life insurance payout CANNOT be made to a minor.
Am I not getting the full story here ??
Permalink Submitted by Alan - IRA critic on Sun, 2024-07-14 20:36
When a minor inherits an IRA, the beneficiary will be a custodian of an UTMA account or a guardian named on behalf of the minor beneficiary. The 10 year rule will still apply with annual RMDs required only for the TIRA if the owner passed on or after their RBD.
Permalink Submitted by Roger Jacobsen on Mon, 2024-07-15 09:28
Thanks for the info Alan.
I think that I understand the “custodian of an UTMA account” for the TIRA concept. But what happens to the RMD that is required for years 1-9 following the death of the TIRA owner ?? Then there is the “final payment” in year 10. Where do those dollars go ?? How are the RMDs taxed ?? At the minor’s tax rate when the possibility of no other income exists ??
Does the “custodian of an UTMA account” for the TIRA have to create an “additional UTMA account” for that minor to “house the RMDs paid out” during those 10 years ??
Permalink Submitted by Alan - IRA critic on Mon, 2024-07-15 11:58
The RMD is distributed to the custodial account or to a trust for the GC, but if an UTMA is named as the beneficiary, the taxes on the distributions will be subject to the kiddie tax and taxed at responsible parent’s highest marginal rate. Further, with an UTMA account, the GC legally acquires full control and access to the IRA and the balance in the UTMA at the age of majority, which is 18 in most states.
Note that the benefit of naming a GC as beneficiary pre Secure Act was based on the very long LE and small annual distributions, but the Secure Act pretty much ruined this strategy with the 10 year rule which adds heavy taxes and loss of tax deferral to the already complex issues of a minor inheriting an IRA. Of course, an inherited Roth IRA will avoid the annual RMDs and could be left intact until year 10 when a non taxable distribution will be made, therefore leaving a Roth is less problematic than leaving a traditional IRA to the GC since there are no taxes, but the 10 year rule still curtails any meaningful stretch.
As a result of the tax issues and hassle, if the portion of the grandparents TIRA that is left to each GC is under 100k or too small to justify creating a trust, it may be better to leave the IRA to the parent of the GC. But if the amount is much larger, naming a trust for the GC makes more sense since that trust could also accumulate the distributions and when the GC reaches 18 they would not have uncontrolled access to the IRA funds.
If the IRA just names the GC as beneficiary and the GC is a minor when they inherit, the court will have to appoint a guardian for the GC if the will does not name the guardian, and this can be time consuming and expensive.
Permalink Submitted by Roger Jacobsen on Mon, 2024-07-15 18:01
Alan – your patience trying to educate me is admirable … thanks so much.
I am still not clear on what happens to the RMD from the minor beneficiary’s Custodial Inherited Traditional IRA for each of the 1-9 years (and the final payment in year 10) following the death of the TIRA owner. For purposes of this discussion assume that the minor beneficiary is my 7 year old grandchild.
Does the custodian of my grandchild’s “Custodial Inherited TIRA” have to create an “additional Custodial non-IRA UTMA account” for my grandchild to “house the RMDs paid out” during those 10 years (before the age of majority is attained at 18) ??
Permalink Submitted by Alan - IRA critic on Mon, 2024-07-15 20:06
When the annual beneficiary RMD is distributed to the UGMA or UTMA account, it will be taxable to the GC, but IRA distributions that exceed 2500 per year will be taxed at the parent’s (usually the UTMA custodian) marginal rate. The UTMA custodian can withdraw from the account only for the benefit of the GC and the GC can assume ownership and terminate the account at the age of majority. The UTMA account can be opened at a bank or brokerage firm and can also receive gifts from others as well as being the beneficiary of an IRA. There usually is no need for more than one such account unless there is more than one GC.
I imagine that most minors that inherit IRAs will probably reach the age of majority before the 10 year distribution period ends. When that occurs the custodian of the UTMA will advise the IRA custodian to assign the inherited IRA to the GC directly and make any further distributions directly to the GC.
Permalink Submitted by Roger Jacobsen on Mon, 2024-07-15 21:16
Many thanks again Alan for your words of wisdom.
My 7 year old GC’s Custodial Inherited Traditional IRA will not have their (surviving) parent as the custodian. The annual beneficiary RMD (once it is removed from the “tax deferred” Custodial Inherited Traditional IRA) will, according to your most recent response, need to be put into a bank or brokerage firm UTMA. I assume that this UTMA would be a “taxable account” and would need to be different than the “tax deferred” Custodial Inherited Traditional IRA.
Sorry to be so dense here, but I see two (2) separate accounts needed for the 10 year period to clean out my Traditional IRA after I pass.
Permalink Submitted by Alan - IRA critic on Mon, 2024-07-15 23:26
Think of the UTMA as a special account with a custodian to handle the inherited IRA on behalf of the GC. It’s like poor man’s trust without the expense of creation or tax reporting. I don’t know if an UTMA account can be created after your death and if you pass without one, a court appointed guardian would probably have to be assigned to manage the inherited IRA. Or if the IRA balance will be substantial you could instead create a trust the GC to be the beneficiary instead of an UTMA or court appointed guardian. Or you could include a provision in your will to create a testamentary trust after your death and list that trust on your IRA now to be the beneficiary. But like the UTMA, you would need to determine who is to be the trustee of the trust for the GC, similar to naming a custodian for the UTMA. Unlike an UTMA, from which the GC assumes full control at age 18, a trust could contain provisions to limit access to the funds for a longer time period, until GC completes some higher education milestones, etc.