Trust as IRA Beneficiary Strategy Question Involving Grandchildren
Client in mid-60s anticipates/plans that he will have general assets of $1 million and $1 million left in his IRA at the time of his death (i.e., that he will die before all RMDs are taken and general assets are spent). No spousal issues.
Client would like to create a discretionary accumulation revocable trust and name the Trust as beneficiary of the IRA. Beneficiaries are three grandchildren or their issue if deceased; no charities; trust becomes irrevocable at owner’s death. Upon grantor’s death, Trust assets divided into equal shares for those grandchildren who are living or who have living issue; if not living and no issue, share divided among other grandchildren. If none at all, to owner’s living heirs.
Although there are currently no disabled beneficiaries, the Trust would also have a supplemental needs trust provision with any residuary funds distributed to the other grandchildren/issue when a disabled beneficiary dies.
I understand the historical problems inherent in naming a revocable trust as an IRA beneficiary, and until the SECURE Act, I had contemplated use of separate retirement account trusts for each grandchild (and for H&W clients with minor children). Having given greater study in this matter, I no longer see the need for separate trusts, especially when only grandchildren are involved.
There are no Eligible Designated Beneficiary issues and the trust would be a see-through trust (and thus a Designated Beneficiary). Therefore the full payout would need to occur by the end of 10 years. Under this scenario, it seems that the trustee could take distributions from the retirement account and make larger payments in the same year to those grandchildren who do not have creditor issues, thus avoiding trust tax rates. If distributions of general trust assets and IRA withdrawals are managed/balanced, especially since equal IRA withdrawals need not occur each year, the IRA could be dissipated at the end of 10 years by greater payments to the responsible grandchildren and lesser payments to the problem grandchildren, while leaving the general trust assets for additional distribution to the errant beneficiaries in future years when and if they straighten up.
Does anyone see any problems with this design?
Permalink Submitted by Bruce Steiner on Mon, 2021-02-15 02:33
Most people would have separate trusts for each grandchild. However, you may have a single trust for all of the grandchildren if you prefer.
The tradeoff to making distributions is that it throws the amounts distributed into the recipient’s estate and exposes it to the recipient’s creditors and spouses, and Medicaid. The trustees would have to weigh that against the income tax savings.
Bruce Steiner
Permalink Submitted by Randall Vaughan on Wed, 2021-02-17 19:42
Revocable Trust contains non-retirement assets and is also a see-through accumulation trust named as IRA beneficiary. Trustee has discretion to make unequal periodic trust distributions to several Designated Beneficiaries based upon need and responsibility.My quesitons is whether the trustee may take a distribution from the IRA in one year can pay the entire withdawal to only one beneficiary who pays tax on the distribution. If the trustee may distribute the withdrawals unequally and since the DBs are ultimately entitled to equal shares of the entire trust assets, the trustee would presumably need to balance the values of the taxable distributions with those trust assets that are not taxable.