Setting Up Trust as IRA Beneficiary
A prospect has come to us with 1.3 Mil in his 401(K) plan and wants to preserve his exemption for NJ Estate tax purposes which is 675,000. We are considering rolling 675,000 to an IRA and naming a trust as the beneficiary of the IRA. The spouse would be the primary beneficiary of the trust with his adult chidren as contingent beneficiaries.
Our question is should the trust document be prepared while the owner is living or just a provision for it in his will similar to what might be done to create a CLT for non-qualified property. Owner is age 70 and will have to start RMD’s in 2011.
Any thoughts or comments please.
Permalink Submitted by mk foss on Sun, 2010-10-17 21:04
During lifetime the identity of the beneficiary does not affect the amount of RMDs so the age of the IRA owner does not affect how soon you need to have a trust in place. I’m talking IRA here rather than 401(k) because you can deal with the IRS rules and not the rules of a particular employer plan.
A trust can be a qualifying IRA beneficiary even if it is unfunded so the choice of a current trust or one created by the will is not important if you’re just looking at timing.
Peeling off $675,000 from an existing IRA could be considered a pecuniary bequest that is taxable to the owner’s estate. It is much better to have a fractional bequest to the trust or to split the IRA before death and name the to be funded trust as the beneficiary of that IRA. The owner could take distributions and make transfers to the rest of his retirement funds periodically to keep the balance at 675k – if that’s the most important thing.
The provisions of the trust – how it defines income for trust accounting purposes for example – are very important with an IRA beneficary trust. You need an attorney who is expert in these matters to help with the drafting. Some custodians offer a “trusteed IRA” but these are often not flexible enough.
Permalink Submitted by Bruce Steiner on Sun, 2010-10-17 21:41
See my article on this in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.
Then let the lawyer handle the details.
Mary Kay is correct that it doesn’t matter whether the trust is created in the Will or in a separate document. But defining income and principal is not an issue. Since the trust is essentially a credit shelter trust, it will generally give the trustees discretion to distribute more or less than the income.