IRA – inherited in trust by estate attorney & RMD
Dear Folks,
I have been asking around, but I am having a hard time with this. I have a client that deceased in year 2010. He
was age 87 and we took the RMD on his age for year 2010.
This year it is extremely complicated. The estate attorney that the wife went to recommended that she bypass
herself as beneficiary and instead choose the trust (the contingent) as the owner of the IRA (with the wife as
the trustee).
Here is the registration on the IRA now:
” Jane Doe, trustee of the John Doe Trust dated May 11th, 1994, as
beneficiary of the John Doe IRA (deceased 3-29-10).”
Jane is age 85 this year. For the above registration, whose age do we use to
calculate the RMD? His or Hers? (he would be age 88 if he lived).
Or, do we need to calculate the RMD as a IRA-BDA and use that table ?
Of course, we asked the estate attorney, but they said to ask the accountant.
We asked the accountant and they said to ask our back office at the brokerage.
Our back office at the brokerage says to ask a tax professional.
And so it keeps getting passed around.
Permalink Submitted by Peter Lingane on Thu, 2011-12-01 16:01
The trustee is not relevant.
Is it possible to look through the trust to the beneficiaries? Is the trust irrevocable and valid under state law? Are the beneficiaries identifiable from the trust document? Was appropriate documentation provided to the custodian?
Assuming positive responses to these questions, required distributions are generally based on age of the oldest current or remainder beneficiary. Required distributions are based on the age of the decedent if one of the beneficiaries is not a real person and if the decedent dies after his or her required beginning date.
Trusts typically say “all income to X.” How does the trust define “income?” If the trust is silent, there is a definition in many state principle and income acts but knowledgeable commentators are unsure how this provision applies.
Choate covers trusts in detail in Chapter 6 of her “Life and Death Planning for Retirement Benefits”, 7th Ed., $100, ataxplan.com.
Permalink Submitted by Bruce Steiner on Thu, 2011-12-01 17:09
The lawyer has the document, and the legal training to read it, so he/she should be the one to advise you. Since he/she can’t, or doesn’t want to, the trustees should consult another lawyer.
Is the disclaimer valid? If the wife disclaims, she can’t have any power, even as a trustee, to decide as to distributions to other beneficiaries of the trust (except as limited by an ascertainable standard).
Peter: except for marital (QTIP) trusts, trusts do not “typically” require that the income be distributed. To require that the income be distributed would defeat both the asset protection and estate tax sheltering of the income as it is distributed. But we don’t know what this trust says.
Permalink Submitted by Peter Lingane on Thu, 2011-12-01 19:28
If the trust requires the distribution of some or all of the accounting income and if the document does not define accounting income, the trustee’s new tax adviser needs to understand the relationship between accounting income and IRA distributions. Gorin and Jones, Trusts & Estates, November 2008 discuss this topic in depth and Choate, op. cit., mentions the conflict between the UPIA and Revenue Ruling 2006-26.
Permalink Submitted by Bruce Steiner on Thu, 2011-12-01 19:33
Peter is correct that the definition of “income” in the Uniform Principal and Income Act in effect in many states with respect to IRA benefits is inconsistent with the rights of an income beneficiary for purposes of the marital deduction.
But I think we can safely assume that Jane would not have disclaimed in favor of a marital trust.
A trust other than a marital trust is not likely to require that the income be distributed; and even if it does, there is no marital deduction involved, so it’s just a matter of determining how much has to be distributed to the income beneficiary. Assuming Jane consults with a different lawyer this time, her new lawyer should be able to advise her as to what she may or must distribute from the trust.
Permalink Submitted by Peter Lingane on Thu, 2011-12-01 20:16
While the IRA has only challenged the UPIA definition in the context of QTIP trusts where their hammer is the marital deduction, the same uncertainty as to the definition of accounting income applies to bypass trusts.
Depending on the terms of the trust and the definition of accounting income, the income beneficiary might receive most of each required IRA distribution or only a small fraction of each distribution; the income tax associated with each distribution would be paid primarily by the income beneficiary or by the trust (at likely higher rates). Again depending on the terms of the trust and how accounting income is defined, it might be possible to design the investment strategy to minimize distributions from the trust if estate tax sheltering or if the rights of the remaindermen are important.
Permalink Submitted by Bruce Steiner on Fri, 2011-12-02 03:17
Why would you require that the income of a credit shelter (bypass) trust be distributed? That would defeat the purpose of the credit shelter trust, which is to have the assets available in case the spouse needs them, but out of her estate and protected unless and until she needs them.
Peter is correct, though, that if the credit shelter trust required that the income be distributed, you would have the same issue as to what is income.