How to handle Trusts as a beneficiary
I just want to make sure that I do everything correctly in a situation that a client has just handed me.
Here’s the drill. Deceased had set up a trust: Family Name Family Trust. All of his assets, other than his IRA’s were put into the Family Trust. The trust was established by a firm in California. The deceased had 3 IRAs. Two of the IRA’s with assets of about $250,000 named the Trust as the Beneficiary. The other had his three children named as beneficiaries. Of course, this was the smallest IRA. The three kids, plus one grand child are the beneficiaries of the trust. Now, the firm that was handling all of this money seems to want out, (no surprise there) so my client, who is the executor and lives here in New York has come to me and asked me to take it all over. They want me to open up a new family trust at Schwab, transfer all the assets and then we’ll decide how to divvy it all up and distribute the funds. The deceased passed away in March of 2010. Because they were using the IRA’s to pay for his medical bills more than enough was distributed in 2010 to cover his RMDs, so that will be taken care of with the final Estate Income Tax Return.
So, now what is the best way to handle this so that we don’t mess up the IRAs unless it’s already too late?
1) since the original trust is the beneficiary of the two IRAs, must the ira assets be transferred to that Trust before we move it to a new trust (Schwab insists that we do like registration)? I’m worried about mingling IRA assets with trust assets.
2) If so, is that a total distribution making all of the distribution taxable at the trust level in 2010?
3) Can we open Inherited non-spousal IRA’s for each of the trust beneficiaries and transfer their portion out of the trust into the new IRA’s titled IRA of Mr. Jones, deceased FBO beneficiary and thus stretch the IRA’s out over the beneficiaries life time without it being a taxable event?
Any ideas or enlightenedment would be appreciated. I’ve handled many a non-spousal IRA set ups, but I’ve never encountered a trust or an estate as a
beneficiary of an IRA.
Thanks for your help.
Michael Terry
[email protected]
Permalink Submitted by mk foss on Thu, 2010-05-27 21:28
You can’t create a new trust. The family would just be changing the investment advisor/manager for the trusts. When a trust is the beneficiary of an IRA – the IRA remains in tact. The RMD (beginning in 2011) will be transferred from the IRA into the trust account and distributed or administered just like any other trust asset.
The IRA will also be transferred to a new custodian. It will be a beneficiary IRA so Schwab will want to know about the trust – but no one has legal standing to create a new trust under the circumstances.
You should find a knowledgeable CPA and attorney to help with this.
Permalink Submitted by Bruce Steiner on Fri, 2010-05-28 03:07
While it may not be relevant here, if the trustees have complete discretion to distribute principal, they may be able to decant the trust by distributing the assets to a new trust.