IRA beneficiary living trust
My mother, age 80, owner of a Roth IRA, has recently changed the beneficiary from her 5 grandchildren to her living trust. She did this to avoid having the grandchildren (all adults) from having to pay taxes on the IRA distribution. Two questions: Was that the right thing to do? And is there something that I should do as successor trustee with respect to the IRA that would be any different than the handling of the rest of her estate?
Permalink Submitted by Alan Spross on Mon, 2008-03-17 23:33
A Roth IRA distribution will be totally tax free to beneficiaries if they stick to the RMD requirements. The only taxable amounts would be earnings on the Roth if 5 years had not passed from the opening of her first Roth. That 5 years continues to run after her death. SInce earnings come out only after all regular and conversion contributions, it seems highly unlikely that any of the distribution would be taxable unless very large % distributions were taken before the 5 years is up. Maybe there was some other reason to name the trust as beneficiary, but there is no tax advantage.
The RMD rate could also be imperiled if the trust does not meet qualification requirements per p 39 of IRS Pub 590. Moreover, even if the trust does meet qualification requirements for look through treatment, the RMD must be based on the oldest of any of the trust beneficiaries. Separate account rules do not apply to beneficiaries of a trust.
Beyond that, the other conditions of the trust will determine what constraints you will be under as successor trustee. As for the Roth IRA, be sure that the trust doumentation is provided to the IRA custodian by the deadline shown on p 39.
Permalink Submitted by Bruce Steiner on Tue, 2008-03-18 17:18
Running an IRA through a living trust can create lots of problems. But without knowing the particular facts (and what she is trying to accomplish), there’s no way to tell whether it will create any problems in this case.