Conduit Trusts and Inherited IRAs
We am weighing options for naming our children as beneficaries of our IRAs. Natchurally we want them to be able to stretch withdrawals as much as possible. Ed’s books have been most helpful but a couple of questions remain. Does anyone have information on rulings concerning Conduit Trust assets in divorce proceedings? Are they considered assets of a sole beneficiary? And, are inherited IRA assets excluded from divorce proceedings? Many thanks for any insights that can be provided.
Permalink Submitted by mk foss on Sat, 2010-07-24 22:05
Beneficiaries can be changed at any time so no ownership is attributed to a beneficiary of an IRA while the original owner is alive. IRAs are treated as the property of the original owner or the beneficiary. In a community property state, an inherited IRA is the separate property of the spouse that inherited it and would not be an asset that’s split along community property lines. I’m not sure how it would be treated in a common law state.
Permalink Submitted by Bruce Steiner on Sun, 2010-07-25 01:17
Protecting inherited IRAs against potential creditors (including spouses) is is the subject of an article I wrote that is schedule to appear in the September 2010 issue of Trusts & Estates, which will come out soon. The lawyer who handles your estate planning should subscribe to this publication. Or, if you remind me by posting again on or after November 1st, I’ll post a link to the article.
In about 3/4 of the states, inheritances are not subject to equitable distribution upon divorce, though if the child commingles the inherited money with his or her other money, it becomes difficult to trace which money is which. In about 1/4 of the states, inheritances are subject to equitable distribution upon divorce. If you are concerned about your children’s potential creditors, including spouses, the solution is to provide for your children in trust rather than outright. This applies to IRA benefits in the same way it applies to other assets.
Conduit trusts rarely if ever make any sense. They don’t provide the same degree of protection as fully discretionary trusts.
In a conduit trust, each year’s required distribution from the IRA has to be paid out to the beneficiary. If the beneficiary lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust. All of the IRA benefits will have been paid out to the beneficiary, will be included in the beneficiary’s estate for estate tax purposes, and will be subject to the beneficiary’s potential creditors, including surviving spouses and possibly including divorcing spouses.
If you create a fully discretionary trust, you have to make sure that no one older than the oldest child can ever receive any of the accumulated IRA distributions.
For more on trusts as beneficiaries of retirement benefits, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
Permalink Submitted by Bob Lloyd on Sun, 2010-07-25 15:04
Thank you, Mr. Steiner. Very informative article.