IRA beneficiary is a spendthrift
My friend is 88, in good health, and has a trust. She also has an IRA and wants to give it to her 3 children who are current beneficiaries of her IRA at 33.3% each.
One of her children (age 60) has had a rough life (jail, homeless, drugs, odd jobs his whole life barely getting by). She is concerned about giving him a lump sum as a beneficiary of 1/3 of her IRA. His share would be about $80k today. There will be other assets on top of the IRA of maybe $100k.
She would like it to be given to him in monthly installments so that it could last him for years to come.
What is the best way to go about setting this up?
I’ve read some about a spendthrift trust. Would a spendthrift Trust be the beneficiary for his portion of the IRA? If it is, can he, rather than the trust, be taxed on his withdrawals so it looks through to him if trust is named as bene? His tax bracket is low, so it would be best if he has the tax liability. I assume the 10 yr rule would be in play and he would need to get it all out in 10 yrs.
Thank you in advance for any help you can provide.
Permalink Submitted by Alan - IRA critic on Thu, 2023-06-01 22:26
In order to limit access, the trust would have to accumulate the IRA distributions and pay taxes at the higher trust rates. If the distributions were passed through the trust currently and taxed at the beneficiary personal rate, the spendthrift protection would be lost. Since your friend is 88 and past the RMD age, the beneficiary (trust or personal) would have to take annual RMDs in years 1-9 of the 10 year rule. Who would be the trustee of this trust?
Permalink Submitted by Morgan Gough on Sat, 2023-06-03 16:12
She asked me to be the trustee if a spendthrift trust were set up and needed someone to administer. Can the bene be the trust, have the IRS look-through to the son for tax purposes, (I saw the look-though possibility in this forum for an IRA bene creditor bankruptcy situation), take the distrubutions over 10 years to satisfy the IRS which should keep the taxes lower since it’s over 10 years, and if/when it is drained based on the spendthrift instructions outlined in the trust, continue to release funds from the trust now (since the IRA is depleated) until all funds are gone.