QTIP Trusts for IRA second marriage
I have a new client 56, she is a widow, her marraige was a second marriage and her spouse left his IRAs in a QTIP for the benefit of his wife. She may receive 4% per year from the trust. Her trustte and his lawyer are advising her that she must pay the income tax on the IRAs over the next 5 years and she can not take the single life lection over her lifetime. Is it possible for the trust to receive her RMD and pay up to the 4% per year and stretch the tax owed over her lifetime? Her husband was not receiving any benfits fronm the IRAs yet.
Permalink Submitted by Bruce Steiner on Fri, 2008-06-13 17:06
Quite likely. See Revenue Rulings 2000-2 and 2006-26.
Why doesn’t the trustee think he can stretch it out over her life expectancy? If there is a defect, can it be cured?
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Michael Mahoney on Fri, 2008-06-13 17:17
The attorney that drafted the prenuptial and the trust told the spouse it was her husbands wish that she receive the trust income only and that they had to us ethe 5 year rule. He died 12-30-2006 BRD.
Permalink Submitted by Bruce Steiner on Fri, 2008-06-13 18:58
They are not inconsistent. For this purpose, let’s accept that she gets the income (or 4% of the value of the trust) each year. If that is the case, that should be easy to tell from the trust.
My question was why he thinks the trustee can’t stretch distributions out over her life expectancy (and if there is a defect that would prevent the trustee from doing so, whether it can be cured).
Finally, does she have the right to claim an elective share, and if so, does it make sense for her to do so?
Permalink Submitted by Michael Mahoney on Fri, 2008-06-13 19:22
My client asked their attorney which drafted the documents why she had to pay the tax based on the 5 year rule as the trustee has just informed her last week. The attorney agreed with the trustee based on the wishes of the deceased spouse. You are correct she receives the greater of the income or 4% per the document. I am not aware of the issues with the right to claim an elective share, I doubt her attorney would advise her to do this as the attorney is folowing the intent of the deceased spouse.
What would be the defect? How can she get a second opion and objective represenation with this? Can her CPA handle this issue? Would Mr. Slott’s firm handle this type of issue? Should he have her own attorney instead?
Permalink Submitted by Bruce Steiner on Fri, 2008-06-13 19:27
Either there’s a miscommunication or the trustee’s lawyer is not familiar with these issues.
She needs a lawyer who is familiar with these issues and can review the Will or trust instrument and tell her what her choices are.
Permalink Submitted by Al Fry on Fri, 2008-06-13 19:56
Since he is dead, his wishes don’t really mean anything, unless somehow the attorney put some sort of “defect” in the trust to cause it to not qualify as a see-through trust. Can’t imagine what that would be.
Permalink Submitted by Michael Mahoney on Mon, 2008-07-07 14:50
Could the trust retain most of the RMD rather than distribute it all to the beneficiary? I read that the UPIA allows the trust to classify only 10% of the RMD as income to the beneficary
Permalink Submitted by Bruce Steiner on Mon, 2008-07-07 15:01
A forum such as this can be useful in providing general information, but for specific legal advice you should consult with counsel who can review the documents and make recommendations based upon the particular facts and your objectives.
The lawyer should be familiar with Revenue Ruling 2006-26, which may help in answering your question.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL