Trust as Beneficiary
Trust was listed as beneficiary of mom’s IRA. Mom was taking RMD when she passed. 2 children under 59 1/2 yrs. old are trustees and beneficiaries of the trust. One child plans to take the money from her share of the IRA out immediately. Is she subject to the early 10% withdrawal penalty?
Permalink Submitted by Alan Spross on Tue, 2007-08-14 22:31
No, there is never an early withdrawal penalty on an inherited IRA. However, if the trust is “qualified” for look through treatment, the child would be forfeiting the benefit of stretching out the RMDs over the oldest trust beneficiary’s life expectancy, losing continued IRA tax deferral and perhaps increasing her marginal tax bracket for the year of IRA distribution. But there is no early withdrawal penalty.
Permalink Submitted by [email protected] on Wed, 2007-08-15 01:26
In addition, depending on the terms of the trust, she may not have the right to take out her share. As a trustee, she has a fiduciary responsibity to follow the trems of the trust, not to follow her own wishes.
Permalink Submitted by Rich Lorenzo on Wed, 2007-08-15 22:48
Alan: How would a trust be qualified for look through treatment?
Permalink Submitted by Alan Spross on Wed, 2007-08-15 23:59
The requirements are listed in IRS Pub 590, p 38, and you will note that the IRA custodian must be provided with a copy of the trust no later than 10/31 following the year of death.
Note that if a trust is qualified, the rate at which the IRA must be distributed to the trust is reduced, and tax deferral benefits are extended. But as Al posted, this has no bearing on how fast the trust itself must distribute the funds to beneficiaries. In a discretionery trust, the trustee is given the authority and guidelines on the distributions out of the trust, and this does not directly affect whether the trust is qualified or not for the IRA RMD rate to be determined by the oldest beneficiary.
Permalink Submitted by Rich Lorenzo on Thu, 2007-08-16 22:45
So, Alan at the end of the day…a qualified trust will be able to stretch the IRA distributions over the lifetime of the oldest beneficiary?
Permalink Submitted by Alan Spross on Fri, 2007-08-17 02:48
Right. And if the trust provides discretion to the trustee to accumulate income, the remainder beneficiaries must also be considered in determining the oldest beneficiary.