RLT as Roth benficiary?
Are there any disadvantages to making a revocable living trust the beneficiary of a Roth? The Roth has been in existence for more that five years and I am over 59 1/2.
Are there any disadvantages to making a revocable living trust the beneficiary of a Roth? The Roth has been in existence for more that five years and I am over 59 1/2.
Permalink Submitted by Bruce Steiner on Mon, 2010-02-22 04:56
Possibly, depending on what the trust says.
Permalink Submitted by Bill Todd on Mon, 2010-02-22 14:41
Can you cite a reference so I can learn what the possible disadvantages are?
Permalink Submitted by Al Fry on Mon, 2010-02-22 19:05
First of all, who do you want to get the Roth when you die? Is there more than one potential bene? Do you want them to cash it out (normally not recommended), or be able to take tax-free payments over their lifetime?
Permalink Submitted by Bill Todd on Mon, 2010-02-22 22:34
Al, Thanks for your reply but I am not sure I understand your question. I want the funds in the Roth to become part of the principal in the trust and be used by the trustee for the purposes defined in the trust document. Specifically, on my death the funds in the trust will be used for the care of my current wife for the remainder of her life and then pass to my daughter from my first marriage.
Permalink Submitted by [email protected] on Tue, 2010-02-23 15:18
Roth IRAs pass according to beneficiary designations, so you really don’t need a trust to accomplish this. If you want your wife to have access to the funds first and then your daughter from your first marriage when she is gone, just name your wife as primary beneficiary and your daughter as the contingent beneficiary. During your wife’s life, she will have access to the funds but must take a required minimum amount (but she can however take more). Any funds left in the Roth IRA when she passes will go to your daughter. If you are worried that your wife will deplete the Roth IRA leaving nothing for your daughter, then you might want to consider using a trust.
The problem with using a trust as a beneficiary is that you typically lose the Roth IRA benefits of tax free growth unless the trust is properly setup (which very few are). If a trust is named as the beneficiary and it does not qualify as a look through trust, it would be forced to completely liquidate the Roth IRA by December 31st of the fifth year after your death, thus losing the tax free growth benefit of a Roth IRA. The discussion regarding what qualifies as a look through trust and how they work is too complex for this forum so I suggest that you work with a qualified IRA advisor (an Ed Slott Elite Advisor would be a wise choice) to give you advice on your specific situation.
Permalink Submitted by Bruce Steiner on Tue, 2010-02-23 15:36
If the original poster wants to leave his Roth IRA to his wife in trust rather than outright, he can name a trust for his wife as the beneficiary. It can be a marital (QTIP) trust or a credit shelter (bypass) trust. If he does not have enough other assets to fill up the credit shelter trust, he can (with additional complexity) leave to the credit shelter trust the portion of the Roth IRA needed to fill it up, and the rest of his Roth IRA to the marital trust.
This gives him additional control over the Roth IRA benefits, but limits the stretchout to his wife’s life expectancy. If he were to leave his Roth IRA to his wife outright, she could roll it over, name new beneficiaries, and get a longer stretchout, but she would have complete control over it.
He may also wish to consider the possibility of death at at time when there is no Federal estate tax.
Notwithstanding the previous post, I think he should work with tax/estates counsel, who should be able to give him the appropriate advice based upon the particular situation and his objectives, and should then be able to draft what he wants.
For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of the Estates, Gifts & Trusts Journal: http://www.kkwc.com/bio.php?r=30.
Permalink Submitted by Bill Todd on Tue, 2010-02-23 17:18
Bruce, Thanks for your detailed answer. It gives me what I need to investigate this in more detail.