Trust to inherit IRA proceeds
I have a client that recently passed; he had a large IRA that he named his trust as the beneficiary. He has three children, one having special needs and he has established a special needs trust for that child. I don’t know much about trusts and you may not be able to answer this question – I am assuming any rational person would set a trust that would allow his children to have pass through access to these funds, another words the ability to stretch the IRAs over their life expectancy. Is this possible to have the trust inherit the funds and roll them out of the trust to the individual’s name so they can stretch them and avoid the tax consequences of the trust inheriting the funds. I hope the question make sense and I apologize for the long winded question.
Permalink Submitted by mk foss on Tue, 2011-08-30 02:23
It is common for IRA benefits left in a trust pay out the RMDs to the beneficiaries. Anything paid out is taxed to the recipient at their tax rates and not to the trust. It’s often common that the trust that is the IRA beneficiary by its terms will split into a separate trust for each trust beneficiary. In that case the life expectancy of the oldest trust beneficiary is used to determine RMDs for all of the separate trusts.
Private letter rulings have been issued that allow a trust to distribute the IRA benefits to the beneficiary so that RMDs continue to the beneficiary instead of to a trust.
In any case, you need an expert to read the trust agreement and see what it specifically provides. The attorney who drafted the trust may have knowledge of the decedent’s intent. The IRA custodian will also have a view on how the trust beneficiary is handled. In some cases, a trustee may have to “transfer” the IRA benefits to another custodian that is more flexible in carrying out the intent of the trust agreement.
Permalink Submitted by Bruce Steiner on Tue, 2011-08-30 02:39
Depending upon the terms of the trust, it may be possible for the trustees to stretch the IRA out over the beneficiary’s life expectancy.
If the trustees of a child’s trust can distribute a portion of the IRA to that child, then (again, depending on the terms of the trust) the trustees should be able to, on a year by year basis, distribute some or all or none of that year’s IRA distribution to the child (or to the child’s children or grandchildren), or accumulate it in the trust, depending on what they think best at the time.
“Any rational person” is strong words. But unless the amount involved is too small to warrant administering a trust, our clients provide for their children in trust rather than outright. It’s possible to set up the trust so that (if desired) the child can have effective control over the trust, while still keeping the inheritance out of the child’s estate for estate tax purposes, and better protecting it against the child’s potential creditors (including spouses). The same reasons for leaving assets in trust rather than outright apply to IRA benefits, though there are some additional constraints when naming a trust as the beneficiary of retirement benefits.
In the case of a child with special needs, it’s even more important to provide for that child in trust rather than outright.
I don’t know what you mean by “his trust.” The IRA owner can’t be a beneficiary of his IRA benefits, since he’ll be dead. I assume you meant trusts for the benefit of each of his children.
For more on trusts as beneficiaries of IRA 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.
Since you say you don’t know much about trusts, you may wish to bring in co-counsel who is familiar with trusts.