special needs trust ira beneficiary- tax rate?
If a trust is named beneficiary of an IRA, and the trust has spend thrift provisions to keep the heirs from blowing all the money at once or in the instances of Special Needs in which the beneficiaries have restricted access to the funds, can the IRA still be stretched and would the distribution be taxed at the highest Federal tax rate or at the rate of the benefiaries? What sort of instances would the IRA be taxed at the trust tax rate of 35% rather than the beneficiaries tax rate?
Thank you,
Permalink Submitted by mk foss on Thu, 2009-09-10 18:11
When a trust is the beneficiary of an IRA, distributions are measured by the life of the oldest trust beneficiary. Each year the required minimum distribution (RMD) would be transferred from the IRA to the trust. If the trust agreement requires distributions to beneficiaries, the beneficiaries will be taxed on the amount they receive. Anything accumulated within the trust, will be taxed at the compressed rates – you get to 35% around $11k of net income.
The stretch is accomplished by the measuring life of the beneficiary, in some rare occasions it could be based on the life of the trust grantor or a remote beneficiary.
The trust should specifiy how the RMD is treated for tax purposes. The trust could say that all RMDs are to be distributed, in that case the beneficiaries would pay all of the tax. If the trust is silent, state law determines how much of a RMD is income for distribution purposes. The state law could say as little as 10% is income so that 90% would be accumulated and taxed at the higher rates.
Permalink Submitted by Bruce Steiner on Fri, 2009-09-11 22:26
If the trust is properly drafted, it shouldn’t matter what is income and what is principal. The trustees will be able to distribute the income and principal, or accumulate the income, taking into account all of the facts and circumstances, including (but not limited to) income taxes.