IRA and Trusts
I’d like to pose a question about IRA and appointment to trusts.
Case in point. A will stipulates that at death, a deceased spouse’s Texas community property share of IRA proceeds are assigned to a surviving spouse’s “trust”. Assuming the IRA beneficiary designation does indeed assign the deceased spouse’s community share of an IRA to that spouse trust, I do not believe that would be equivalent to a spousal rollover. In that event, am I correct in assuming that the surviving spouse would continue receiving RMDs based on the deceased spouse’s life expectancy? (Both spouse’s are currently required to take RMDs.)
If the deceased spouse’s IRA beneficiary designation were to direct that the deceased spouse’s community share was to go to the trust, could the surviving spouse still roll over her community share? I would think so and the IRA would end up split. But what happens after the surviving spouse’s death, after receiving income payments from the trust based on the deceased spouse’s RMDs? If the provisions of the trust were that it would terminate and distribute per the will of the surviving spouse, I would think that insofar as the part held in trust, the surviving spouse’s 4 beneficiaries (children) would lose the ability to receive IRA proceeds as separately “inherited IRAs. (If the trust had not terminated, at least the continuing distributions could have been made based on the oldest beneficiary’s RMD.) But if the trust is terminated and proceeds distributed to the children, how does it pass tax-wise? My guess is that it would come out as lump sum distributions to each – and taxed under the worst possible conditions.
On the other hand, if the IRA beneficiary designation is in fact “spouse”, then all the above is moot, since a beneficiary designation trumps a will stipulation. Then the spouse could do a spousal rollover and convert the deceased spouse’s RMDs to RMDs based on her life expectancy. Then I believe she could designate that each of her children are separate beneficiaries and able to take their shares as “inherited IRAs” – where the beneficiary designations would be “Jane Doe, deceased FBO Child Doe”
Can you give me some feedback on this?
Permalink Submitted by Alan Spross on Thu, 2007-09-27 04:43
First, your final paragraph. You are correct, the spouse and do a rollover and even then convert to a Roth if desired. At survivor’s death the children designated beneficiaries can set up independent and separate accounts and use their respective life expectancies.
With respect to the trust questions, the trust conditions are critical in determining the options. If the trustee IS the surviving spouse and the surviving spouse is the sole beneficiary, then several PLRs have authorized the rollover for that spouse to their own IRA. However, if the above conditions are not met, the trust would have to be determined as qualified for look through treatment. If qualified, the RMDs could be based on the oldest trust beneficiary, and if the trust is not a conduit trust, remainder beneficiary life expectancies also must be considered to determine who is the oldest.
If the trust is NOT qualified, then the “non individual” rules kick in and the stretch is decimated by the 5 year rule if the trustor passed prior to RBD. In your case, the RBD had passed and therefore the trustor’s non recalculated remaining life expectancy would apply.
If the deceased spouse’s interest only were directed to the trust, the surviving spouse could rollover their own CP interest to their own IRA and name beneficiaries as well as convert some or all to a Roth. You are correct here.
You are also correct, that if the trust were allowed to terminate under it’s terms, the remainder of the IRA could be assigned to the trust beneficiaries. But as you thought, it would be too late for any of them to use the separate account RMD rules even though they may secure separate account independence and control. They would have to continue RMDs based on the remaining non recalculated life expectancy that applied to the trust prior to termination. The stretch would therefore be seriously impaired. If the trustee can accumulate IRA distributions in the trust, then you have the added complexity of high trust marginal rates and/or state UPIA issues affecting the taxable amount of any distributions from the trust.
I am sure Bruce Steiner could embellish this (or more) if he sees this thread.
Permalink Submitted by Bruce Steiner on Sun, 2007-09-30 03:20
Alan: thank you for the kind words. There are so many branches here, and it’s not clear what the IRA owner is trying to accomplish, or even whether the IRA owner is still living, that it isn’t possible to cover all of the possibilities here.
If the spouse can withdraw all of the trust assets, then she can do the rollover. See my article on this subject in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf. I don’t know why anyone would go through the effort to create such a trust and leave the IRA to such a trust when he/she could simply leave the marital share and the IRA to the spouse outright.
If the IRA is payable to a more typical marital trust, then (assuming all of the requirements are met) the IRA can be stretched out over the spouse’s life expectancy. The spouse will receive all of the income of both the trust and the IRA. To the extent the IRA distributions exceed the income earned in the IRA, the excess will stay in the trust as principal (or be distributed to the spouse, if the trust so permits and the trustees so choose).