Who pays IRA Trust taxes?
Single woman died with majority of estate in IRA’s, several passed to individual people. One had her Revocable Living Trust as an IRA beneficiary. No stretch was wanted. $100,000 is to be paid out: 50% to a church; 5 people split the other 50% equally. Taxes are to be paid, but how? Does trust pay taxes first then send? [Brutal rate]
Hopefully, it is five $10,000 checks and five 1099’s are sent to the people and each person pays own tax. A $50,000 check sent to the church. Since the church is tax exempt, it pays no tax on the IRA funds, right or wrong? Is a 1099 still needed to be sent to Church anyway? I could not find answers in form 590. Did I miss it or are these instructions somewhere else?
Trust meets all 4 qualifications as a pass through trust for IRA purposes.
Permalink Submitted by mk foss on Tue, 2010-08-31 20:17
You should read the instructions for Form 1041. The trust takes a charitable deduction for the 50% transferred to a charity. The trust issues a Schedule K-1 to each individual receiving a distribution. The beneficiaries will report the income from the K-1 on Schedule E of their personal tax returns. The trust will owe no income taxes provided that the funds are distributed to all beneficiaries in the same calendar year that the IRA is collected. If the distributions occur in a later year, all bets are off and the trust will have an extremely large tax liability.
Permalink Submitted by Harve Senter on Tue, 2010-08-31 20:51
Thank you.
Question: This woman died Feb 2009. IRA funds went into trust late 2009. I thought that IRA had until the end of the September one year following death of owner to pay out the IRA and therefore the tax liability. Is that correct or am I off base on this?
Permalink Submitted by mk foss on Fri, 2010-09-03 22:55
The September 30 date is the beneficiary identification date – in this case the trust was always the beneficiary; taking the distribution proved that. The date that the trust made a distribution is not relevent for beneficiary identifcation purposes.
A trust normally files tax returns on a calendar year basis – so distributions by 12/31 shift the identity of the entity actually paying the tax. There are a couple of exceptions to the calendar year cut-off to shift taxation to the beneficiary but September 30 is not a relevant date for either of them.
Permalink Submitted by Courtney Maggio on Thu, 2017-02-09 19:01
My father passed away in September of 2016. His estate was held in a Trust with my sister and I named as co-representatives. He had a traditional IRA in the trust. We took the mandatory distribution in 2016. The funds were held in mutual funds and a CD, which were not liquid until 2017. Originally we were told that the best thing to do was take the full distribution of the IRA, and that we would each file it on our personal tax returns under Section E because our tax liability would be less. But, now we are being told that if we take the funds it will be at a very high tax rate, because the trust is being taxed. Based on previous answers I have read here, It looks like it is better to take the distribution for tax purposes. Is that correct? And, can you tell me how long we have to take the distribution without having the trust taxed at the higher rate? Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2017-02-09 20:13
The terms of the trust including whatever discretion the trustees possess will determine how IRA distributions to the trust are taxed. A lump sum distribution to the trust will terminate any tax deferral benefit of the IRA and is rarely beneficial regardless of whether the trust pays the tax at the higher trust rates or the income is passed through to the beneficiaries of the trust and taxed at their lower rates. It is also critical to know if the trust is qualified for look through purposes or not because that determines what the RMD divisors will be. If not qualified the RMDs are determined based on whether your father passed before or after his required beginning date. Normally, the best scenario is that the trust is qualified and RMDs are then based on the oldest trust beneficiary. Annual distributions taken are limited to the RMD amount since that continues tax deferral on the IRA as long as possible. If those RMDs are passed through to the beneficiaries each year, the taxes are lower and the creditor protection of the trust is lost on the RMDs passed through. If retained in the trust, the tax rates are higher but the creditor protection is much better. One beneficiary might need the creditor protection more than the other.