IRA Trusts
When using a trust as beneficiary of an IRA, can the trust be revocable as well as irrevocable? Is there special language that would have to be used or can any trust be designated as beneficiary of a IRA (Roth orTraditional)? Is there ever circumstance where an improperly drafted trust could cause the IRA held by such trust being subject to trust tax rates? Thank you very much for responses.
Permalink Submitted by Anonymous (not verified) on Thu, 2009-02-19 18:05
You can use a wide variety of trusts as IRA beneficiaries, depending on the purpose intended. However, if the beneficiary is to be allowed to use their own life expectancy for RMDs, the trust must be qualified for look through treatment. See “Trust as Beneficiary” in Pub 590, around p 39 for the requirements for qualification.
A revocable trust can be named, but it must become irrevocable upon owner’s death. If the terms of the trust do not allow for passing through distributions to the beneficiary on a K1, the higher compressed trust tax rates will apply.
If the terms of the trust allow it to be terminated by the trustee, the IRA can then be assigned to the trust beneficiaries, but that will not change the original RMD requirement except for certain spousal beneficiaries who may be able to get a ruling allowing a rollover in their name.
Permalink Submitted by Anonymous (not verified) on Thu, 2009-02-19 23:07
The trust(s) can be set up in the Will, or in a separate trust instrument.
If the trust contains the appropriate flexibility, the trustees can distribute or retain the IRA distributions, taking into account income tax rates, as well as any other factors the trustees deem appropriate.
The most complicated aspect is that the stretchout is limited to the life expectancy of the oldest beneficiary of the trust.
For more on this, see my article in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf