minor children as Roth IRA beneficiary
Hello,
I am setting up an estate plan and don’t know how to handle the Roth IRA. I have read Ed’s book, “The Retirement Savings Time Bomb” and understand if I make a trust (for my minor children) the beneficiary they will lose the ability to make withdrawals based on their life expectancy, and instead will have to withdraw it over 5 years. If I make my children the direct beneficiary, then at age 18 they would be able to withdraw all the money and do with it what they want. In my opinion that is too young for the amount of money involved.
So what are my options? I have met with an estate planning attorney, and he indicates that he needs to refer me to an IRA specialist.
We are 36 years old, our children are 9 months and 3 years, so this would be in the event of our deaths over the next 20-30 years. The IRAs are currently all Roths, and have a value of about $200,000. The children have separately funded 529 accounts so this money would not be needed for college.
Thank you
Permalink Submitted by Linda Randazzo on Sat, 2010-07-17 18:21
I am trying to understand the reasoning behind the information you read regarding being subject to the 5 year rule. I am not an estate planner. Just a few thoughts and i’m sure someone with actual knowlege will educate me. My thoughts;
If the trust is a qualifying trust (the beneficiaries are obvious and not tied to countless contingencies) shouldn’t the successor trustee(s) that is named be able to distribute the IRA money as directed by you as grantor in the trust agreement before age 18 and after? I know normally the trustee can not delegate their fiduciary duty but if the successor trustee(s) happens to be the pre-established plenary guardian for the children, i’m wondering if that might work.
In other words can’t the trust be set up for the successor trustee(s) to distribute the IRA funds to the minors for expenses before and after 18 if they are the clear beneficiaries of the trust according to the terms that the grantor(s) have established?
Just a few thoughts, i welcome corrections, it helps me to learn.
Thanks
Permalink Submitted by mk foss on Sun, 2010-07-18 07:04
There is some confusion about the use of the trust as a beneficiary – the five year rule you describe only applies if the trust does not qualify as a designated beneficiary. Many people name a trust for their children as contingent beneficiaries for a Roth IRA while they are minors with the spouse as the primary beneficiary. When the children are no longer minors, you can change the beneficiary designation to list them directly once you feel they are responsible enough to handle an inheritence. I’m surprised that the attorney doing your estate plan is unfamiliar with the use of trusts as IRA or Roth IRA beneficiaries – is he/she an estate planning specialist?
Permalink Submitted by robert axelrod on Sun, 2010-07-18 20:11
yes, he is an elder law and estate planning specialist.
If as you described, then what would make/not make a trust a designated beneficiary? Why is this an issue at all if minors can be contingent beneficiaries and not invoke the 5 year distribution rule?
Additionally, because of estate tax considerations, the Roth would name our “disclaimer trust” as the primary beneficiary, and a testamentary trust for the children as contingent beneficiary. Would this change anything?
Thank you
Permalink Submitted by mk foss on Sun, 2010-07-18 23:16
The default distribution method for IRAs of all types is life expectancy – so if you name a beneficiary that has a life expectancy for a Roth the life expectancy is used. The five year rule applies if there is a beneficiary (like a charity or an estate) that doesn’t have a life expectancy. If a trust “qualifies” – the life expectancy of the oldest trust beneficiary is used.
The usual beneficiary scheme is to have the spouse as the primary beneficiary and the children or a trust for the children as contingent beneficiaries. I’m not sure why your estate plan does not contemplate the spouse as primary beneficiary because the best tax benefits apply with a spouse-beneficiary.
Permalink Submitted by robert axelrod on Sun, 2010-07-18 23:40
obvious follow up then is how to make a trust “qualify”…
the reason the spouse is not primary bene is for estate tax purposes… we will lose my single exemption if I die first and leave it all in her name (vice versa for her).
Permalink Submitted by Alan Spross on Mon, 2010-07-19 03:07
If the spouse is named as primary and a qualifying trust for the benefit of the children as contingent beneficiary, then the spouse can disclaim all or part if the estate tax situation at the time makes this action beneficial. The conditions required for trust qualification are outlined on p 38 of Pub 590. Most trust are qualified, but there are also deadlines for providing copies of the trust to the IRA custodian and also to keep them informed of changes.
If the trust fails to meet the requirements, it is considered a non individual beneficiary and since a Roth IRA has no RBD, all deaths are considered as prior to the RBD and that triggers the 5 year rule if the trust is not qualified. For a traditional IRA, the 5 year rule could only apply if the owner passed prior to the actual RBD.
Of course, if Congress could bring some degree of stability for a couple of decades to the estate tax situation, it would ease the need to constantly revisit estate planning every single year, and to amend the various trusts.
Permalink Submitted by Bruce Steiner on Tue, 2010-07-20 16:53
I wrote an article on trusts as beneficiaries of retirement benefits, in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal, which may answer some of your questions: http://www.kkwc.com/docs/AR20041209132954.pdf.
In general, if a trust is a beneficiary, none of the IRA benefits can ever go to anyone older than the person whose life expectancy you want to use to measure the stretchout. In this case, this would probably be your oldest child. We do this routinely in situations such as this.