Leave IRA to grandchild but not get $ until they are 30
I want to leave my IRA to my grandchildren, but I do not want them to begin receiving distributions until they are 30. Right now, they are 10 and 7. I am 64, have a serious illness but am doing well so far. Can be set up as a trust within the IRA now? AS a revocable living trust?
Permalink Submitted by Jose Morales on Mon, 2009-09-21 17:01
First let me wish you a speedy and full recovery from your illness.
You cannot “set up a trust within the IRA” but you can establish a trust and name it the beneficiary of the IRA. If it is a revocable trust then it would not qualify for look through status and would be treated as a non-individual beneficiary upon your passing. If you happen to pass before your required beginning date the trust would have to close the account according to the provisions of the 5 year rule. If you happen ot pass after your required beginning date the trust would have to take distributions based on your remaining single life expectancy using the reduction method. Neither option allows for the funds to remain untouched until your beneficiaries reach the age of 30.
Even if you named a trust that qualified for look through status, there would be no way of leaving the funds in the IRA account until the beneficiaries reached the age of 30 unless you pass away in 18 years, when the youngest would be 25, and your trust opted for the 5 year option to close the IRA.
Of course, distributions can be taken by the trust from your IRA and then placed in a non-IRA account to be held until the beneficiaries reach the age of 30, they just won’t have the tax advantages of being in an IRA after the distribution. Someone who knows more about trusts can discuss how best to set something like that up.
Permalink Submitted by mk foss on Mon, 2009-09-21 17:29
You could set up a trust now but it might be costly in income tax dollars. A trust that can accumulate income uses the life expectancy for RMDs of the oldest possible beneficiary. If anyone older than the grandchildren would receive the benefits if both grandchildren pass away before age 30, then that person’s life expectancy is used. The RMDs will accumulate inside the trust and pay taxes at compressed rates. The 35% bracket is reached at about $11K of income. You could consider having the RMDs distributed because they will be small and the grandchildren should have low tax brackets. It might be a good idea to keep the IRA in trust forever, pay out RMDs annually and allow the trustee to withdraw higher amounts for college education, weddings, house warming, childbirth etc.
You could also use an irrevocable trust. You need not fear using an irrevocable trust as an IRA beneficiary. If you change your mind about the beneficiary, you can just change it. The irrevocable trust just goes away if it isn’t funded.
Permalink Submitted by Bruce Steiner on Tue, 2009-09-22 03:00
This is far simpler than the previous comments suggest.
You can create a trust or trusts to be the beneficiary of your IRA. It can be in your Will, or in a separate trust instrument. It doesn’t matter whether it’s revocable or irrevocable. Even if it’s revocable now, it will become irrevocable upon your death.
You can even create the trust or trusts within the IRA agreement itself. But as I discuss in my article on this subject in the current (September 2009) issue of Trusts & Estates, in most cases I don’t think that’s the best way to do it.
Upon your death, your IRA benefits will be payable to the trust (or to the separate trusts for your grandchildren if, as is likely, you create a separate trust for each grandchild). The trustees must take distributions from the IRA over the life expectancy of the oldest beneficiary of the trust (which will likely be the older grandchild). As Mary Kay points out (and as was the case in PLR 200228025), if anyone older than the older grandchild may receive the accumulated IRA benefits (for example, upon the death of a grandchild), then the distributions will be limited to that person’s life expectancy. But it shouldn’t be that difficult to limit the beneficiaries so that no one older than the older grandchild can be a beneficiary.
The trust can provide any terms you want (except that none of the accumulated IRA benefits can be payable to anyone older than the desired measuring life). In most if not all states you could, for example, prohibit distributions before age 30, as you propose. As Mary Kay suggests, you may instead want to give the trustees discretion over distributions. But I would not want to require distributions as she suggests. But the choice is yours. If you give the trustees discretion, you need not worry about the income tax rates — the trustees will be able to take that into account (along with any other factors they deem appropriate) in deciding upon how much, if anything, to distribute.
For more on this, see my article on trusts as beneficiaries of retirement benefits in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
Bruce Steiner, attorney
NYC
also admitted in NJ and FL