IRA strech for minor under 18
Hi there,
According to Ed’s book, IRA has to be designated to a person in order to strech. However, I am told by a lawyer if a person is a minor under age 18, any proceeds/payments related to IRA and insurance will not be paid to that person. In that case, how can a minor strech the IRA inherited? How can the minor take the required distribution if no money is paid to him/her before he/she reaches 18? Any suggestions?
Thanks
Trina
Permalink Submitted by Alan Spross on Mon, 2009-12-07 03:33
The RMD must still come out of the inherited IRA based on the minor’s age if the minor is designated on the agreement, but the payee depends on state law. In some states it would go to an UTMA account for the benefit of the minor, and IRA agreements are worded to conform to any state law requirements.
If a qualified trust for the minor’s benefit is named on the agreement, the minor’s life expectancy would still determine the RMD calculation.
Permalink Submitted by trina jiang on Tue, 2009-12-08 03:56
Thanks for your response. You mentioned “agreement” a few times. When you said that if the minor is designated on the agreement, what agreement are you talking about? The agreement with the financial institution, where the IRA is held?
When you said that if a qualified trust for the minor’s benefit is named on the agreement, what agreement is this one?
Thanks
Trina
Permalink Submitted by Alan Spross on Tue, 2009-12-08 05:01
The agreement referred to is the IRA agreement, specifically the beneficiary clause in that agreement. Naming the minor makes the minor a designated beneficiary eligible to use their own life expectancy (non recalculated) for RMDs. If a trust is named as beneficiary in the IRA agreement, the minor who is the beneficiary of the trust cannot use life expectancy unless the trust is “qualified” , meaning that it meets all the requirements listed in Pub 590, p 39.
If state law requires the RMDs of the minor be paid into an UTMA account, if there is not already such an account, one must be created to receive the RMDs or other distributions until the minor reaches the state age of majority. At that point, the minor has a legal right to all the UTMA funds. If the parent does not want the remaining IRA totally available to the minor at majority, then they need a trust that restricts access, perhaps limiting the IRA distriubtions just to the RMD amount with the trustee of the trust having authority to distribute the money to the beneficiary or hold it in the trust. Income tax rates on a trust are very high, however, if the income is not passed through to the beneficiary.