Death and the IRS
My Dad passed away in ’06 at 80 years old. He was not married. He left my brother and I as co-trustees and beneficiaries of his estate. Part of his estate is an IRA with CD’s in it. A Trust Agreement establishing his revocable trust states that all his assets would remain in trust at his passing and could not be distributed for 10 years. I’ve tried to decipher the IRS code for IRA’s that pass from an estate to a trust. I’m not sure if the IRA has to rollover into a Trust with an EIN or if it can stay in his name. Also, I’m not sure what to do with the RMD’s. Like the rest of you, I’m trying to minimize the impact of taxes and avoid penalties. Any input welcome. Thanks.
Permalink Submitted by Alan Spross on Wed, 2007-08-08 20:14
What was the wording on the IRA beneficiary designation, and if there was no designation, what does the agreement indicate for default beneficiary?
Permalink Submitted by Wayne McLeod on Wed, 2007-08-08 20:17
The wording on the IRA Bene Designation states that my brother and I are equal beneficiaries; the account to be split 50/50.
Thanks.
Permalink Submitted by [email protected] on Wed, 2007-08-08 20:32
Then the IRA death benefit goes to you and your brother directly. The trust is not involved, as it was not a beneficiary of the IRA.
Permalink Submitted by Alan Spross on Wed, 2007-08-08 22:01
That’s right, and if you create separate inherited IRA accounts no later than 12/31/07, you can each use your own single life expectancies for your RMDs starting this year, and name your own successor beneficiaries. That will give you a decent stretch and avoid a raft of problems accumulating income in a trust at high tax rates etc. Actually, only one of you needs to peel off your part from the inherited IRA and re register the two accounts accordingly. But if he was behind on his RMDs including 2006, you do each need to take them ASAP.
You are fortuneate that the IRA was not left to the estate, probably more due to the 10 year restriction and trust tax rates than the loss of stretch.
From his age, I assume you are not kids, and if there was no obvious justifiable reason for the 10 year thing, you should probably look at this as if he chose to keep the IRA out of the trust rather than he just messed up by not naming the trust as IRA beneficiary.
Permalink Submitted by Wayne McLeod on Thu, 2007-08-09 12:41
This is great information and clarifies some of the confusion I have with Publicaiton 590. Thank you.
One additional question: what does “stretch” mean in the contect used here?
Thanks again.
Permalink Submitted by [email protected] on Thu, 2007-08-09 14:30
“Stretch” simply means that one could take mininimum distributions over their life expectancy, allowing more of the account to have a chance to experience income tax-deferred growth. In my organization, we refer to them as “Extended Payment Options”.
Permalink Submitted by Wayne McLeod on Mon, 2007-08-13 20:20
Just out of amateur curiosity, what if the primary beneficiary of the IRA was my father’s trust rather than my brother and I? I would think that situation would cause a taxable event.
Permalink Submitted by [email protected] on Tue, 2007-08-14 14:51
Assuming the trust was qualified as a “see-through” trust, the stretch would still be available (to the trust), however it would have to use the shortest of all of the bene’s life expectancy. Sometimes that could be a huge difference, other times not so much.