Trust Language -Redefining Income- and treatment of RMD’s in a Conduit/Look Thru.

Submitted by Pat Chesp on Tue, 2021-03-23 15:48

Consider a conduit/look-thru trust where the trustee has discretionary ability to retain an RMD and distribute it in a future year The trust has only one beneficiary. The one beneficiary is disabled and therefore normally entitled to life time rmd stretch. The trust assets include the IRA and also ordinary mutual funds.

Questions.

1) Does the fact that the trustee can retain and not distribute an RMD ( and accept the tax consequences) effect the stretch calculation at any current or future point or effect the of the trust from an IRA stretch perspective?

2) (This is a related question)

Is it sensible to include language in the above trust (or other trusts that handle IRA/RMD’s)
so that trust income (distributable and accounting) is redefined “to include cap gains, required minimum distributions from IRA’s or annuity payments that may incorporate both income and return of principal”. Are there any potential differences between state and federal law with respect to re-defining income.

Note: the RMD’s are from a “rolled over IRA” account and no longer held by the employer.

Thanks



Submitted by Alan - IRA critic on Tue, 2021-03-23 18:19

The following article will address some of your more general questions, but not all. It suggests that this trust should be an SNT in order to contain the required restrictive language to protect govt benefits. Not sure how this trust has only one beneficiary or perhaps you meant just one individual beneficiary. SNTs and your related question are heavily state dependent.
The SECURE Act’s Impact On Discretionary See-Through Trusts (kitces.com)

Submitted by Pat Chesp on Tue, 2021-03-23 22:16

Thanks for article. only one beneficiary and spend thrift issues are reason for giving more discretion to trustee.  Any articles regarding advatage/benefit/issues with  giving  trustee ability to re-classify RMD’s and annuities as income appreciated.  Thanks 

Submitted by Bruce Steiner on Tue, 2021-03-23 22:21

You are correct that if the person is disabled, a discretionary trust for his/her benefit will get the life expectancy stretch so long as, during his/her lifetime, no distributions may be made to anyone not disabled or chronically ill.  
RMDs and other IRA distributions are taxable income regardless of whether they’re income for trust accounting purposes.  To the extent the trustees distribute them, they’ll carry out income to the beneficiary.
You could add a provision allowing the trustees to include capital gains in distributable net income.  We typically do that.  However, there won’t be much in the way of capital gains in the early years when most of the money is still in the IRA, and in the later years the IRA distributions will be large so it’s unlikely that the trustees will distribute more than the ordinary income (mainly the IRA distributions).
You would probably include some special needs language to make your intention clear, though it should be sufficient if the distributions are fully discretionary.  
Bruce Steiner

Submitted by Pat Chesp on Wed, 2021-03-24 14:31

First I wanted to say thanks for help in the past.  Around 2005 I read the Slott Ira book and started using the forum.  I remember you and Mary Kay used to frequently answer questions.   At that time wife and I put together a Family trust with conduit provisions.  We are now re-visiting as cicumstances have changed and time has passed. Assets to be distributed include IRA’s house and brokerage. I was thinking of having the “income redefine lanuguage” in the credit shelter and qtip as well as in the two discretionary trusts which kick in at second to die, and each discretionary trust, each of which   has a separate beneficiary.  Both beneficiaies are currently on Soc Dis Income although one may be able to return to full work at some point.   In  several  places I saw info similar to the following about RMD income and I note your suggestion above.  So I definitly will want that language included. “”If a trust is to be named beneficiary of retirement funds, careful consideration must be given to the drafting language of the trust. Under trust accounting rules, an RMD may be considered both income and principal. Unless the document is drafted to redefine income, taxable income can be trapped in the trust.””How an RMD (from a roll-over IRA)could be considered something other than  income like return of principal confuses me however looks like language can take care of it.  Thnaks Again for you asistance. 

Submitted by Bruce Steiner on Thu, 2021-03-25 22:59

Except in the case of a marital (QTIP) trust, it doesn’t matter what’s income and what’s principal.
Conduit trusts rarely made sense in 2005, and rarely make sense now.  The principal exception is for spouses and persons not more than 10 years younger, to get the life expectancy stretch.
Bruce Steiner

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