401(k) to Trust as beneficiary
A-B Trust exists. Wife survives husband (withn last 60 days). Trust is sole beneficiary of 401(k) and wife is sole trustee of Trust. Community property state. 1/2 of estate value is real property and 1/2 is 401(k). Wife will likely sell the real property (personal residence) within the next 2 years.
The Trust qualifies as see-through. Trustee can decide which trust (A or B) to put the assets into, considering the best tax advantage to be gained.
It appears to me that by putting the real property into the “Survivor’s Trust” and the 401(k) into the “Exemption Trust”, the wife can preserve her cap gain exclusion on her residence while also taking RMDs based on her life expectancy, since the see-through affords her that priviledge. I realize the the children will need to carry on her RMD upon her death or even take a lump sum or 5 year payout. Any thoughts on why it may be better to do this in reverse.
Thanks in advance,
Jerry Gintz
Permalink Submitted by Bruce Steiner on Sun, 2007-10-28 17:55
You didn’t say how much the residence and the 401(k) benefits are worth. Presumably they are less than $2 million each, since if they were more than that, only $2 million of the total would go to the credit shelter trust. You also didn’t say how old the spouse is.
The $250,000 capital gain exclusion isn’t the major factor. If the residence is community property, there is a basis step-up for both halves of it. If she sells it within the next couple of years, the gain will be limited to the increase in value since her husband’s death.
You didn’t say whether the wife has the right to withdraw all of the assets of the survivor’s trust (so that for tax purposes it’s as if it passed to her outright), or whether it is a QTIP trust. But I assume she has the right to withdraw all of the assets of the survivor’s trust, since if it were a QTIP trust, then the residence wouldn’t qualify for the $250,000 capital gain exclusion even if it were placed in the survivor’s trust.
Assuming that the spouse can withdraw all of the assets of the survivor’s trust, if the 401(k) benefits go there, she may be able to roll them over into her own IRA (see my article on this subject in the October 1997 issue of Estate Planning), possibly convert to a Roth IRA (which may be difficult here if she doesn’t have any other money with which to pay the tax on the conversion), name new beneficiaries, and get a longer stretchout. Whether that makes sense may depend upon the value of the residence, the value of the 401(k) benefits, her need for distributions, and the likelihood she’ll have a taxable estate if she takes money from the credit shelter trust so as to maximize the stretchout. Additional factors may include the terms of the credit shelter trust, and the degree of control she has over it.
So, as you might have realized by this point, this is something she should discuss with the attorney handling her husband’s estate, or other competent tax/estates counsel, who can give her specific advice based upon the particular facts and her objectives.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL