IRA to a Trust

Submitted by Anthony Perrone on Fri, 2020-04-24 16:09

If you leave an IRA to a trust based on the new IRA rules for parents leaving it to a trust, what are all the negatives?
Can you give an example.

Thanks!



Submitted by Alan - IRA critic on Fri, 2020-04-24 16:18

If you are referring to the Secure Act, there are several issues yet to be clarified by the IRS, particularly with respect to trust beneficiaries. In most cases, the stretch will be replaced by the 10 year rule which could result in higher tax rate due to distributions taken over fewer years. However, if the trust is for a disabled or chronically ill beneficiary, the stretch is preserved for these beneficiaries. Also, if the trust inherits while beneficiary is a minor, it could still protect the funds from the minor who is pursuing a higher degree until age 36.

Submitted by Anthony Perrone on Fri, 2020-04-24 17:05

Is there any negatives, consequences leaving an IRA to a trust when the beneficaries are Non-Spouse adults? 

Submitted by Alan - IRA critic on Fri, 2020-04-24 18:14

  • There have always been trade offs when naming a trust as beneficiary compared with naming individuals directly. Basically, to protect the principal against creditors or spendthrift beneficiaries by naming a trust as beneficiary, the trade off has been higher tax rates for assets accumulated in the trust and taxed at the higher trust rates. Beneficiaries must also work through the trustee of the trust to make investment changes in the IRA or to receive distributions from the IRA and/or trust itself. The trust will have to file Form 1041 annually.
  • Used to be that if the trust was not qualified for look through, the stretch was mostly lost. With the Secure Act, it is now lost for most trust beneficiaries anyway.

Submitted by Anthony Perrone on Fri, 2020-04-24 18:50

I thought the beneficiarys could set up inherited IRAS after it goes to the trust, is this not correct. which should avoid a high taxation of the trust. 

Submitted by Alan - IRA critic on Fri, 2020-04-24 20:30

The beneficiaries cannot set up inherited IRAs unless the terms of the trust allow the trustee to terminate the trust or distribute the inherited IRA out of the trust. 

Submitted by Bruce Steiner on Sun, 2020-04-26 21:07

  • Our clients generally provide for their beneficiaries in trust rather than outright.  This keeps the beneficiaries’ inheritances out of their estates for estate tax purposes, and protects their inheritances from their creditors and spouses.  The same reasons for leaving other assets in trust apply to retirement benefits.
  • It’s possible to give a beneficiary effective control of his/her trust without giving up these protections.  In other words, the beneficiary may be a trustee, may have the power to appoint (give or leave) the trust assets to anyone he/she wishes (other than the beneficiary or his/her estate or creditors), and may have the power to remove and replace his/her co-trustee (provided the replacement trustee isn’t a close relative or subordinate employee).  If the trust receives retirement benefits, nothing may ever go to anyone other than an individual or another trust subject to the same restrictions (i.e., no charities).
  • The tradeoff is that trusts are generally subject to income tax at higher rates.  The trustees may avoid the higher income tax rates by making distributions, but amounts distributed lose the above protections.  This a more of an issue now that the stretch is generally limited to 10 years.  This makes Roth conversions more attractive than they were before, since the trustees may accumulate the IRA distributions without adverse income tax purposes.
  • Bruce Steiner

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