Trust as Beneficiary of IRA

Submitted by Matthew Van Tine on Mon, 2020-08-24 21:42

The decedent passed in June 2020 at age 91. Decedent had an IRA naming her living trust as beneficiary.
Under the trust, after the death of the grantor, the trust becomes an administrative trust to settle bills, etc. Once the period of administration ends, the trust then is split into separate trusts for the two adult children of the decedent.
I have been told that by using the trust as the IRA beneficiary, the proceeds of the IRA would have to be paid into the trust and would be taxed as income now. Or, as a bank officer suggested, is it possible to set up a new IRA in the name of the trust now, and then split that IRA into two IRAs for the two adult children without paying taxes on the IRA proceeds now?
Thanks.



Submitted by Alan - IRA critic on Tue, 2020-08-25 00:33

  • Only the amounts distributed from the IRA each year are taxable in that year.  There is no requirement here to make IRA distributions  other than RMDs or in this case to pay estate administrative expenses.
  • As written, the trust will not be qualified due to a non individual beneficiary. However, if all the administrative expenses can be determined and distributed by the beneficiary determination date (9/30/2021)  leaving only the individuals as trust beneficiaries, the trust can still be qualified for look through, and become subject to the 10 year rule.
  • If the trust fails qualification, then the RMDs fall under non individual beneficiary rules and because death occurred after the RBD, the IRA would have to be drained in about 4 years with annual RMDs determined using the remaining LE of the decedent.
  • Spitting the IRAs now will not change the RMD scenario, although once the administrative costs are fully distributed and paid (taxed at the higher trust rates, but possibly the trust will be able to deduct some costs),  if the trust provisions allow assignment, the IRA could then be assigned to the individual beneficiaries remaining who would either be subject to the 10 year rule with no annual RMDs or the 4 years remaining of decedents LE as explained above. Any IRA Distributions would then be made to the respective inherited IRAs of each beneficiary and taxed at their personal rates.
  • A trust containing this beneficiary scenario is a non standard approach and risks failure to meet qualification standards for the trust.

Add new comment

Log in or register to post comments