IRA inherited through trust – problems
Hi! Thanks for all the great info I’ve found so far on this forum. I have a few more questions about my situation.
I have inherited a few separate IRA accounts through a trust. Some of the accounts were in mom’s name with dad as primary bene, some in dad’s name with mom as primary bene. All had the trust named as contingent bene. My sister and I are the beneficiaries of the trust, which provides for all trust assets to be distributed to us (equally) upon the death of (the latter of) mom and dad. Dad passed in 10/05, mom in 11/06.
Nothing was done about the trust, estates (there were a few small accounts that were not in the trust), IRAs, RMDs, etc. until just recently. Sis is trustee, she’s out of state and until a couple of months ago was just not dealing.
Mom apparently took some RMDs automatically in 2006 before she died, but did not take others. We are going to try to get the penalties for those excused. A lawyer is working on this for us (more on him later).
We let 10/31/07 pass without getting the trust document to the IRA custodians, because I just found out about the deadline, too late. So we may be stuck with taking our RMDs based on mom’s life expectancy (she was 75 when she died). We have an attorney working on taking a RMD for 2007 (we’re just guessing the amount, trying to overestimate to avoid penalties, without going too far to avoid excess taxes), by doing a distribution to the trust this week. One of the banks is apparently willing to do this upon a fax from sis (trustee and personal rep. of mom’s and dad’s estates, both of which have been opened). I’m not confident that the atty. sis hired is really an expert at this, though. He is in the state where the assets are located, I am in NY and sis is in CA.
Here’s the problem: what do we do with the funds that have been transferred to the trust? I am pretty sure the trust would qualify as a pass-through. When do we have to take the funds out of the trust for them to be taxed to us, rather than to the trust? By the end of the year? Should we do that? I’m not in the top tax bracket, I don’t think sis is either. She really doesn’t want her husband to get his hands on the $$, though, whereas I would like to use my share. Can she leave hers in the trust, even though the trust directs her to distribute?
Also, what do we do about the IRA accounts after this end-of-year rush to get the RMDs? What are our options for distributions, rollovers, whatever? Will some of the RMDs be based on mom’s life exp. and some on dad’s (he was taking distributions when he died, also)? How do we find out what those amounts are?
I’m sure this message clearly shows my ignorance about all this, but anything anyone can say to help me through this mess would be helpful.
Permalink Submitted by Al Fry on Thu, 2007-12-27 15:48
The contingent bene on your father’s IRAs should not come into play, since your mother was primary bene (unless she disclaimed all or a portion). In other words, once your mother became the new owner, she would have named her own bene. If her trust was named bene, then RMDs would be based on the oldest trust bene, even after the trust terminates (unless your mother owned it as an inherited IRA). I’ll let others jump in for your other questions.
Permalink Submitted by Cynthia Hannah on Thu, 2007-12-27 16:21
I don’t think mom did anything after dad died. She was the beneficiary on his IRAs (and there is a 401K also, I just found out, that probably has the same beneficiary situation), but I don’t think she ever took any action to roll them over or whatever. She died before she took care of any of that. What a mess!
Also, you say that the RMDs will be measured by the life of the oldest trust beneficiary (my sister), but didn’t we have to get the trust document to the custodian by 10/31/07 (mom died in 06) to make this election? Aren’t we stuck with the prior payout schedule (mom’s or dad’s) if we didn’t meet that deadline? (If you can tell me that’s not so, wow, I’ll be really happy!)
Permalink Submitted by Alan Spross on Thu, 2007-12-27 17:50
As you probably have determined, any assumption regarding the chain of events here that is incorrect will send you down the wrong road.
Al is correct that if nothing was done with your father’s 401k or IRA, these assets would NOT be paid to the trust because the contingent beneficiary is immaterial if the primary (mom) was alive at Dad’s death. Her estate would become the actual beneficiary of those assets, that is her will would determine where the assets go and not the trust unless there is a pour over will that directs these assets into the trust. Now, although Mom apparently did not make an active decision to assume his IRA or 401k, she is still treated as having assumed them if she failed to take the 2006 RMD required as beneficiary. This needs to be determined as it will affect the RMD required of the estate, since they both passed after their required beginning dates. The estate RMD will be based on the remaining non recalculated life expectancy of either Mom or Dad depending on the above. Either way, your or your sister’s life expectancy would not apply here. The cooperation of the custodians of these accounts will be needed to confirm both that the estate is the default beneficiary after Mom’s death, and whether she was ever deemed to have assumed the accounts or not. In other words, the chain of events must be re contructed from the beginning in terms of what the custodian documents indicate, and what the will indicates if her estate ends up as beneficiary.
Now to Mom’s own IRAs. For these, the trust DOES become the beneficiary since Dad pre deceased her. The 10/31 date you cited does apply, but perhaps the trust info was provided prior to their deaths. If not, the trust cannot be qualified and would need to be treated as a “non individual” beneficiary causing the RMD to follow your Mom’s remaining single life expectancy of around 13 years rather than your sister’s remaining life expectancy as the oldest trust beneficiary.
The trust distribution issue is one that can become contentious, as the document as you explain it appears to give you beneficiary rights of distribution of your share regardless of how long your sister wants to keep it open. The plan custodians however will insist on paying distributions to the trust as long as it remains in force, but that does not mean that your sister should not distribute your share out to be taxed at your own federal and NY rates. You probably cannot secure a separate account until the trust terminates, but even if you did, your RMD schedule would remain unaffected. If you had to retain counsel, you would need an attorney licensed to practice in CA. You should have been provided with a copy of the trust and any amendments shortly after each death under CA law.
Permalink Submitted by Cynthia Hannah on Fri, 2007-12-28 01:28
Thanks so much! This is really helpful. Sis has started looking for a good trust/estate/tax attorney out there in CA.
I’m not sure whether mom’s will poured everything into the trust, it might have, or it might have simply split the residuary estate between sis and me. I’ll have to check.
I did find out that we have 65 days after the end of the 2007 tax year for the trust to distribute to its beneficiaries, in order for the RMD distribution to be taxable to us instead of the trust. Sis is willing to do that, now that I’ve explained the tax benefit to her, and we’ve talked to the accountant about what we want to do tax-wise.
Anyway, thanks so much! This forum has been the most helpful general research source I have found. It is really nice of you to give out free help like this (I know it’s not “legal advice” and yada yada yada – if you haven’t guessed I’m an attorney myself, just unfamiliar with the intricacies of these particular areas of law. So I know the general disclaimers that go along with sites like this.). It must take a tremendous amount of time to answer all these queries on here. Have a very happy new year!