Testamentary Trust for Minors as IRA Beneficiaries
Hi all,
I’ve been trying to put my estate plan in place for a while now. But every time I think I get close to wrapping it up, I hit a stumbling block. I’ve combed through this site for a while now. I see that other posters are asking similar (but not exact) questions, and I see that they’re getting thoughtful answers. So I figured to give my questions a shot to see what information I can get here. Thanks in advance for reading.
In a nutshell, here’s my plan so far:
1) Other than a living will and a healthcare power of attorney, I’ll generate a financial power of attorney and a will (with accompanying letter of instructions with more details)
2) the will deals with my non-probate assets, ideally to pay off my final debts from cash deposit accounts (leaving some over for the beneficiaries to split evenly, hopefully)
3) the beneficiary designation forms handle my non-probate assets (my most valuable assets)
4) the beneficiaries of my assets would be minors if I pass within the next few years
5) so the will leaves instructions for the executor to hire an attorney to create “look-through” trusts for the minors, managed by the minors’ mothers as the initial trustees, to stretch the non-probate assets
6) the trusts are made to dissolve when each minor reaches the age of 28 so that the administration of the trust (and costs and hassles) can be ended. The minor (who would no longer be a minor then) would take the assets into his or her name for further management at that point.
That sounded simple enough until I starting going through all the beneficiary designation forms. Since the trusts don’t exist yet and won’t until I pass, I didn’t know how to complete the forms now. Leaving the minor’s name alone on the form doesn’t sound like a great idea. I mean I know minors can’t receive property outright, so the account custodian could conceivably cut a check to the minor’s guardian. I’m not comfortable with that, preferring the route of the trust instead.
So I called the custodian recently about options to complete the form. They suggested using something like “Trust for John Doe as created by my will on 1-Aug-2011”. But on this forum I’ve seen other suggestions like “Jane Doe, Trustee, for the trust created for the benefit of John Doe as created by my will on 1-Aug-2011.” Or some variation thereof. That seems simple enough to get to the bottom of, with another message or two with the custodian.
But I’m not clear on if such a designation breaks my 1 IRA into 5 separate IRAs. That’s the option I’d want for the best stretching options, instead of cashing it out and parceling out cash. How do I make sure the account custodian knows to create 5 IRAs out of my 1 instead of allowing the executor to cash it out?
And how will those IRAs be titled? I mean, if that beneficiary designation works, the account custodian will put what name on that inherited IRA? The trust’s name? The minor’s name? I believe the account custodian says it would be titled to the trust. But what then happens when the trust dissolves eventually when the minor is 28? The custodian says “cash it out” but that defeats the purpose of the lifelong stretch that I’m trying to give the beneficiary, right? Can the inherited IRA be retitled later out of the name of the trust when it dissolves into the name of the true beneficiary? Or should the trust be written to last until the death of the beneficiary? How will trustees be named after the initial trustee is gone? Can the beneficiary take over as trustee of the trust for his/her benefit instead of dissolving the trust, leaving the title of the inherited IRA alone in the process?
I’m close to the end of my process, but some help would be appreciated. Thanks again for taking the time to read and help.
Permalink Submitted by Bruce Steiner on Tue, 2011-08-09 15:14
You make sure the custodian knows what to do by saying it in the beneficiary designation in a way that’s sufficiently clear that anyone reading it will know what to do at a time when you’re no longer here to explain it. Your lawyer should know how to draft it.
You may want to discuss with your lawyer whether you want to require that the trusts end at age 28. If you do this and it later turns out that continuing the trusts is preferable, it may not be possible to put the money back in the trust. On the other hand, if the trusts don’t have to end, but it later turns out that it doesn’t make sense to continue the trusts, the trustees can always terminate the trusts and distribute the assets to the beneficiaries (assuming the trusts so permit).
The trustees can distribute the IRA in kind, so that the beneficiaries can continue the stretch.
For more on trusts as beneficiaries of retirement benefits, see my article on this subject: http://www.kkwc.com/docs/AR20041209132954.pdf.
Permalink Submitted by Dennis Prout on Tue, 2011-08-09 19:58
If a Testamentary Trust is named as the beneficiary of an IRA or a life insurance policy, do those assets then become subject to probate?
Permalink Submitted by Amar Patel on Tue, 2011-08-09 20:45
That’s a great question, Dennis. Thanks!
On top of that, I’d like to post a few more…
1) Can something like “beneficiary IRA for the benefit of John Doe, if John Doe survives me” be used on a beneficiary designation form instead of other designations?
2) If so, does this solve
a) the need to specify that I want my IRA split into other IRAs, and not allow a “cash out” at least immediately by my instructions?
b) the issue of who will “own” the beneficiary IRA now (the trust, initially, for the benefit of the minor) and later (the beneficiary himself/herself when of a particular age, to avoid the complexities or even potential challenges to a trust designed to last forever)?
If not, can someone please expound on the “in kind” distribution item some more? I tried researching online for what that means to a beneficiary IRA but couldn’t find anything. That doesn’t mean it doesn’t exist; it might just mean I’m not sure what I’m looking for.
Any other insights on the original post that I made (I asked many questions in there!). 🙂
Permalink Submitted by Amar Patel on Thu, 2011-08-18 03:17
Hi all,
I’m still puzzled about the in-kind distribution thing. Or, generally speaking, I’m not sure I understand the mechanics of how a beneficiary IRA is created, titled, and then passed from a trust to the actual beneficiary at some point in the future. Any additional insight would be appreciated.
Permalink Submitted by Alan Spross on Thu, 2011-08-18 04:00
Re Dennis’ questions:
1) A survival period can be made part of the beneficiary designation IF the IRA custodian will accept that wording. Typical survival periods are 30 or 60 days, but beneficiary access to the funds are restricted until that period passes. Of course, a contingent beneficiary should be named if the survival period is employed.
2) Additional terms and conditions beyond that will require a trust to be established as the beneficiary. This is the usual method to make sure that the beneficiary does not blow through the funds. The trust should contain provisions IF and under what circumstances the trustee will be able to terminate it and distribute the assets, including beneficiary IRA accounts.
In this sense, an “in kind” distribution of the IRA just means that the IRA funds are not distributed, but the trust distributes the IRA out of the trust to the appropriate trust beneficiaries. Here is an article by a noted IRA authority regarding the assignment of an IRA out of an estate or trust:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Amar Patel on Fri, 2011-08-19 03:12
Thanks, Alan! That was a very helpful link. I’ve heard of Ms. Choate before but I didn’t find that article in my other searches. But the bottom line seems to be that I can 1) name a trust in my beneficiary designation forms, 2) have the executor and attorney construct proper look-through trusts, and 3) have the trustee work with the account custodian to do in-kind transfers at some point in the future when the trust is dissolved to keep the stretches going over the beneficiary’s lifespan.
What about:
a) The survivorship stuff: If I pass today, I have 5 beneficiaries. If one of them passes within, say, 15 days, they would not be considered as having survived me. Thus my executor will create only 4 trusts for the remaining beneficiaries. Will my account custodian be adamant about creating a 5th trust for the deceased beneficiary or will the custodian split that share evenly among the surviving beneficiaries?
b) Rolling over the 401(k) to IRA post-mortem. If I pass before I can roll my 401(k) into my IRA, can my executor do that before divvying up my IRA so that those funds too can be stretched?
Permalink Submitted by Alan Spross on Fri, 2011-08-19 03:56
a) If the beneficiary clause in the IRA includes a survival period, it might be worded something like this – ” testementary trusts of equal shares for each of the following beneficiaries who survive me for 15 days. Beneficiaries are (names)” An attorney proficient in state estate and trust law should be consulted for the correct wording.
As Bruce Steiner indicated, the wording must be very clear and cover related contingencies, so legal assistance is critical to avoid unintended consequences. You might also consider changing the beneficiary wording as these minors reach age of majority unless certain of them will still need the control of a trustee.
b) The 401k is basically the same, ie the same beneficiary wording should be used as the plan beneficiary. The trustees can then do a transfer to a properly titled inherited IRA for each testamentary trust. One major difference is that a non spouse or qualified trust inherited qualifed plan can be converted to an inherited Roth IRA whereas an inherited TIRA cannot be converted. Inherited Roth IRAs could grow for many years because the RMD for minors will be very small.
Permalink Submitted by Bruce Steiner on Fri, 2011-08-19 13:04
The comment about the executor hiring an attorney to create the trusts is unclear. You have to create them in your Will (or in a separate trust instrument). The custodian will do what the beneficiary designation says and will take direction from the beneficiaries named or described in the beneficiary designation. If it’s not clear from the beneficiary designation who the beneficaries are, the custodian will likely wait until it receives identical instructions from all of the possible beneficiaries under any possible interpretations of the beneficiary designation, or a court order.
Permalink Submitted by Amar Patel on Fri, 2011-08-19 15:38
Thanks for the ongoing assistance, to both Alan and Bruce! This has been very helpful so far.
But I guess I’m not understanding the comments about the will. Meaning, my will is pretty simple. It does have language to direct my executor to create trusts for the beneficiaries, if they are deemed to have survived me, to share my property equally. Thus, up to 5 trusts will be created.
But I’m not deceased yet. The will hasn’t probated yet. So the trusts don’t exist yet, right? (I think Dennis’s question related to this earlier.) When I do pass, the executor will have those directions to create a trust. But he is not a legal expert, so an attorney (and perhaps a financial planner and/or accountant too) will likely be needed to make sure all the “i’s” are dotted and “t’s” are crossed (meaning, the trusts are proper look-through and/or any other special considerations needed for the beneficiaries at that time). Right?
Then, at some point and will all proper documentation in hand, the executor will contact my IRA custodian. Ideally, all 5 beneficiaries are alive and well for decades after my passing, so nothing too complicated crops up. I can fill my beneficiary designation forms today for my IRA (and the 401(k) eventually) to name the 5 trusts as created by my will. So the executor will have my death certificate, and proper and legal will, and proper and legal trusts. I’d think it’s pretty straightforward then for the IRA custodian to divvy up my IRA into 5 inherited IRAs and put one into each trust. Then in time, the custodian can be contacted for an in-kind trust to “move” the inherited IRAs into the sole possession of the beneficiary when the trust is dissolved. (If the custodian doesn’t seem keen on doing this, a provider-to-provider move can be done first it sounds like.)
But if by some disastrous circumstance a beneficiary doesn’t survive me, then only 4 (or less) trusts will be created. The executor, with my death certificate, proper and legal will, and proper and legal trusts (but not 5 trusts), will then contact my IRA custodian. The custodian will see that I designated 5 trusts, not less than that. Then what happens? I believe my will clearly states that I would want my property split evenly among the remaining beneficiaries, to be held in trust until they are of a certain age. But things like IRAs and 401(k)s are governed by beneficiary designations right? Does that “overrule” my will in this case, leaving that conundrum of needing a 5th trust for the non-surviving beneficiary? Obviously, if I’m around when a beneficiary passes, I simply change my forms and be done with it. But I’m thinking of that “co-death” situation.
Note the following: 1) I’ve thought about the idea of leaving secondary beneficiaries for each of the beneficiaries but that seems to impinge on each’s ability to stretch the distributions because of the varying ages. But I also can’t tell the difference between “secondary beneficiaries” and “mere potential successors” because I think they are treated differently by the IRS. 2) I’ve tried working with the attorney on certain of these questions. But he didn’t seem overly familiar with the “financial logistics” of the estate plan execution. What I mean is that he didn’t seem too clear on what the IRA custodian actually does. He suggested I contact a financial adviser. That financial adviser then suggested I contact an attorney.
So I hope you appreciate that you’ve helped me a ton here. But I want to get clear in my head what is actually supposed to happen. Though I think I’ve made a few forward steps on this forward, I think I have a few more to go. Once I’m set and clear with the way I want to move forward, I can then go back to the attorney and/or financial adviser “one last time” on this and consider the matter closed for now.
Thanks again for all the help so far!
Permalink Submitted by Amar Patel on Mon, 2011-08-22 20:43
Hi all,
I apologize for the length of my last post but that’s the state I’m in. Meaning, the lawyer sorta put me into a dead-end position where I’m left scrambling to answer questions on my own or else start over again with another attorney. I’m not quite sure I can afford that right now, so I’m trying to get some help from this forum. Every little answer seems to inch me forward, so I would appreciate the ongoing help.
Thanks.