IRA Inheritance Trust
Has anyone used the IRA Inheritance Trust? Is there any other benefit other than controlling beneficiary distributions and protection from beneficiary lawsuits, divorce, etc. Another financial advisor has stated this will stretch the IRA more effectively. I do not understand how. Any comments would be helpful.
Permalink Submitted by Bruce Steiner on Fri, 2008-01-18 21:08
The reasons for leaving IRAs to beneficiaries in trust rather than outright are the same as the reasons for leaving other assets to beneficiaries in trust rather than outright. Assets in trust are better protected against the beneficiary’s potential creditors (including spouses), and are not included in the beneficiary’s estate for estate tax purposes.
It has very little to do with the stretchout. Indeed, the stretchout is certain if you leave the IRA outright, whereas if you leave it in trust, you have to make sure that none of the IRA benefits that have been paid to the trust can ever go to anyone older that the oldest beneficiary of the trust (whose life expectancy you are using in determining the required distributions).
If you leave IRA benefits in trust rather than outright, the trust can be set up either in the Will or in a separate trust instument.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Janine Janine on Sun, 2008-01-20 23:43
[quote=”[email protected]“]The reasons for leaving IRAs to beneficiaries in trust rather than outright are the same as the reasons for leaving other assets to beneficiaries in trust rather than outright. Assets in trust are better protected against the beneficiary’s potential creditors (including spouses), and are not included in the beneficiary’s estate for estate tax purposes.
It has very little to do with the stretchout. Indeed, the stretchout is certain if you leave the IRA outright, whereas if you leave it in trust, you have to make sure that none of the IRA benefits that have been paid to the trust can ever go to anyone older that the oldest beneficiary of the trust (whose life expectancy you are using in determining the required distributions).
If you leave IRA benefits in trust rather than outright, the trust can be set up either in the Will or in a separate trust instument.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL[/quote]
Bruce
Do I understand correctly that if you leave your IRA in trust you can use the life expectancy of the oldest beneficiary rather than your own life expectancy?
Thank you.
Janine
Permalink Submitted by Alan Spross on Mon, 2008-01-21 01:09
Right, if the trust is “qualified” for look through treatment, the life expectancy of the oldest beneficiary can generally be used. However, if the owner passed after the required beginning date and there is a beneficiary older than the owner, the owner’s remaining life expectancy can be used, and it would be longer.
Permalink Submitted by Janine Janine on Mon, 2008-01-21 20:17
Thank you very much for the reply. Is leaving an IRA in trust different from having your Living Trust the beneficiary of the IRA? And what makes a trust “qualified” for look through treatment?
Thank you again.
Janine
Permalink Submitted by Bruce Steiner on Mon, 2008-01-21 21:31
Leaving an IRA (or any other asset) to someone in trust rather than outright means just that. Instead of saying I leave $x, or y% of my estate, to A, I instead say I leave $x, or y% of my estate, to my trustees, to hold in trust for A pursuant to the provisions of Article Z of this Will. Instead of naming B as the beneficiary of my IRA, I name the trustees of the trust for B’s benefit under my Will (or under a separate trust agreement) as the beneficiary of some or all of my IRA.
It generally doesn’t make sense in a common law state (in other words, a state that’s not a community property state, like California) to name a living trust as the beneficiary of an IRA. It can’t really help, and it can destroy the spousal rollover and result in the acceleration of the income. If you want it to go to one or more recipients outright, just name them as the beneficiaries of the IRA; and if you want it to go to trusts for one or more persons, just name those trusts as the beneficiaries of the IRA.
The principal requirements to be able to look through to the beneficiaries is that the beneficiaries all have to be individuals, and that none of the amounts distributed from the IRA to the trust and accumulated in the trust can ever go to anyone older than the person whose life expectancy you want to use.
While there are a few states (notably California) where there may be some reason to use living trusts generally, in most cases, unless there’s some special reason for having one in a particular case, they don’t really accomplish very much, other than to create confusion and complexity (as seems to be the case here). They don’t save any taxes, and often the cost of creating the living trust is as much as the cost of probating the Will (and the client has to write the check for the cost of creating the living trust, while someone else writes the check for the cost of probating the Will).
Permalink Submitted by Janine Janine on Tue, 2008-01-22 02:37
Bruce
Thank you very much for your reply. I am in the state of Massachusetts, and a few years ago many of the lawyers were extolling the advantages of a Living Trust.
“If you want it to go to one or more recipients outright, just name them as the beneficiaries of the IRA; and if you want it to go to trusts for one or more persons, just name those trusts as the beneficiaries of the IRA.”
In that case, are you then referring to an Irrevocable Trust as opposed to a Living Trust? 😕 😳
Permalink Submitted by Bruce Steiner on Tue, 2008-01-22 03:20
You’ve asked several different questions.
If you want to create trusts for your children to receive your IRA benefits, you can do so either in your Will or in a separate trust agreement. Your Will becomes irrevocable upon your death. A separate trust agreement, even if revocable during your lifetime, becomes irrevocable upon your death.
I’ve only had one estate in Massachusetts, but in that case, local counsel in Massachusetts was able to probate the Will and handle the local probate court filings without any particular difficulty.
Permalink Submitted by Janine Janine on Tue, 2008-01-22 19:45
Thank you, Bruce, for your patience. I do realize that both my Will and Trust (Living Trust) become irrevocable upon my death. I am currently trustee; my son is successor trustee. I have only one beneficiary, my son. All assets except my IRA’s are in trust. I guess my question is: Since I already have a trust, if I name the trust as beneficiary of my IRA’s, can I use my son’s age to calculate RMD’s?
Thank you again for your patience.
Janine
Permalink Submitted by Alan Spross on Tue, 2008-01-22 20:58
You (actually he as successor trustee) should be able to use his own remaining life expectancy to determine the RMD rate from the IRA into the trust IF the trust is qualified for look through treatment.
Bruce listed some of those requirements. This is also summarized on p 39 of the 2007 Pub 590. Note that there is a 10/31 deadline following the year of your death for documentation to be submitted to the IRA custodian.
A factor to consider is whether you want to provide him the authority to terminate the trust after your death or not. This would be based on facts and circumstances such as needed creditor protection he might need including ex spouse’s. But if he is allowed to terminate the trust, then there probably is no reason not to leave the IRA to him outright.