Options for IRA held in a trust
Grantor died in 2006. His credit shelter trust was funded with an IRA that held annuity contracts. Due to the settlement option chosen at his death, the IRA’s can only be paid out in a lump sum and must be fully distributed by the 5 year anniversary of the grantor’s death or 7/26/2011. The surviving spouse is the net income beneficiary of the trust. She would like to avoid having to pay taxes on a lump sum distribution and maintain the tax deferral of the IRA. I have two questions:
1.) Does the Pension Protection Act of 2006 now allow the trust to roll these annuities into an inherited IRA that would allow the spouse to take distributions over her life expectancy?
2.) Does the trustee have the option of converting the IRA into a Roth IRA?
Thanks for your help.
Permalink Submitted by Bruce Steiner on Tue, 2009-02-03 23:04
Is there a claim against the trustee? (I hope you’re representing one of the beneficiaries of the trust, not the trustee.)
Permalink Submitted by Jennifer Buchanan on Wed, 2009-02-04 12:33
There is no claim against the trustee. And yes, we’re researching options on behalf of the bene, the surviving spouse.
Permalink Submitted by mk foss on Wed, 2009-02-04 19:49
Although the Pension Protection Act will allow a trust to do a rollover, it only applies to qualified plans and nonspouse beneficiaries. Have you looked into a trustee-to-trustee transfer to a new beneficiary IRA?
The five-year rule for IRAs indicates that the account should be emptied by 12/31 of the year that contains the 5 year Anniversary of the death but doesn’t specifiy how much must be withdrawn each year. If it’s allowed the benefits could be spread over 3 years. You should check to see if the annuity will allow an additional year based on the forgiveness of 2009 RMDs legislation.
Once the funds are paid to the trust, there is another question. Are they income or principal? The benefits would be taxable income but not necessarily trust accounting income that could be distributed to the beneficiary.
This situation is complicated on many levels.
Permalink Submitted by Bruce Steiner on Wed, 2009-02-04 22:22
If it’s a credit shelter trust, it shouldn’t matter how much is income and how much is principal (unless the Will mandates the distribution of income, which is sometimes but not usually the case).
Permalink Submitted by Alan Spross on Thu, 2009-02-05 04:56
Was it established that the IRA owner passed prior to his RBD, and that the trust was not qualified for look through treatment?
Or perhaps the annuity itself was structured such that the 5 year payout option would only be elected by a beneficiary when the owner passed prior to the RBD?
The question here is how the annuity provisions square up with the RMD options for trust beneficiaries………