Roth IRA Custodial account and Roth IRA Trust
This question relates to linking an Owner’s Roth IRA Custodial account to a Roth IRA Trust upon the Owner’s death. There is disagreement among the Custodian, the Trustee, the Attorney, and the Owner as to what is correct.
1. During the Owner’s lifetime, the Roth IRA Owner establishes a Roth IRA Custodial account with a Custodian
2. Also during Owner’s lifetime, the Roth IRA Owner executes a conduit Roth IRA Trust which is “unfunded” until the death of the Owner, and wherein the pass-through beneficiary is his grandchild; a Trustee is also named in the Roth IRA Trust. The Trust is entitled: [i]“(Owner’s name) Revocable Roth IRA Trust for the Benefit of (grandchild’s name), dated dd/mo/year”[/i]
3. The beneficiary form associated with the existing Roth IRA Custodial account states: [i]“100% to the Trustee of the (Owner’s name) Revocable Roth IRA Trust for the Benefit of (grandchild’s name), dated dd/mo/year”[/i]
4. Alternative 1: Upon the Owner’s death, should the assets in Roth IRA Custodial account existing prior to the Owner’s death be moved to and be held by a trust account which would be titled [i]“(Owner’s name) Revocable Roth IRA Trust for the Benefit of (grandchild’s name), dated dd/mo/year”[/i], and be managed by the Trustee (including distribution of the annual RMD to the grandchild, as per terms of the Roth IRA Trust)? Under this alternative only the Roth IRA Trust exists after the Owner’s death. This alternative seems consistent with the beneficiary form for the original Roth IRA Custodial account.
5. Alternative 2: Upon the Owner’s death, should the Roth IRA Custodial account existing prior to the Owner’s death be re-titled to read [i]“(Owner’s name) (deceased dd/mo/year) Roth IRA for the Benefit of (grandchild’s name), Roth IRA beneficiary”; [/i]this new account would have the same Custodian. Would the Custodian then continue to hold and manage the assets, and would the Trustee request that each year’s RMD (as per Trust terms) be distributed from the Custodian to the Trustee, and would the Trustee, in turn, distribute the RMD to the grandchild? Under this alternative, there exists both a Roth IRA Custodial account and the Roth IRA Trust after the Owner’s death.
One problem with this alternative is that the re-titled Roth IRA account is an inherited Roth IRA account which means the beneficiary has control — the Roth IRA Trust never becomes viable.
Another problem is that the pre-existing Roth IRA Custodial account beneficiary form names the Trustee of the Roth IRA Trust as beneficiary — it does not name or link in any manner to a successor custodial account.
Please provide details on how to link the pre-existing Roth IRA Custodial account with the Roth IRA Trust, including beneficiary language where necessary.
Permalink Submitted by Alan Spross on Wed, 2012-01-18 23:18
The IRS only requires that the name of the decedent and the name (or entity) of the beneficiary be shown in the re titled Roth IRA account. The order does not matter to the IRS, but it might to the Roth custodian due to requirements of it’s processing platform.
In this case the beneficiary is a trust titled as the grantor and his attorney desires, typically something like “(owner’s name) Roth IRA trust dated xx/xx/2008) . There is no need to show the trust beneficiary’s name because that name and successor beneficiaries are detailed in the trust document, but it does no harm if the IRA beneficiary form can handle all of it.
After the owner’s death the trustee of the trust typically has the authority to change the IRA custodian if they wish, and of course this can only be done by a (IRA)trustee to trustee transfer. The IRA continues as always except that the trustee of the trust functions as a beneficiary of the IRA assets and is effectively limited by both the IRA agreement AND the terms of the trust. The trustee of the trust can never function as an IRA owner, and a beneficial owner may not be able to do some of the things that the actual owner could. The trustee is responsible to take RMDs according to IRS requirements, but also has the responsiblity to provide trust information to the IRA custodian by 10/30 of the year following IRA owner’s death in order to preserve look through treatment for the trust.
What the trustee of the trust does with the RMD after receiving it from the IRA depends on the trust provisions. If it is a conduit trust then the RMD and any other distributions cannot be accumulated in the trust and must be passed through to the trust beneficiary or successor trust beneficiary if the original beneficiary passes. The IRA custodian does not care what the trust does after receiving the funds, they just report the distribution on a 1099R and the trust takes over from there.
Alternative 2 is closer to meeting requirements because the IRA account itself continues as a separate contract as before and the IRA custodian has possession of the IRA funds until distributed to the trust. After the funds are distributed, the IRA custodian no longer has any interest in those funds and reports the distributions on a 1099R. But you cannot have some sort of merged single contract, but this gets back to my earlier question about whether this was to be a “trusteed IRA”. With a trusteed IRA there IS a single merged IRA agreement with a trust attached to it, with the same trustee for both. Merrill Lynch was one of the first to offer this. They have their limitations, so you are probably better served with your trust being totally separate from the IRA contract, functioning as the beneficiary of the IRA.
The trustee of the trust would request each year’s RMD when desired in cash or in kind and be governed by the terms of the trust from there. In the conduit trust the funds would be passed to the beneficiary of the trust and reported to the beneficiary and the IRS on Form K1.
You indicated that you saw a problem with Alt 2 regarding the trust not becoming viable. That is not correct since the trust IS the beneficiary of the IRA. The trust beneficiary (grandchild) has no authority other than to hold the trustee of the trust to the provisions and authority vested in the trust document. If the grandchild wanted to replace the trustee, there are probably provisions in the trust he must follow to do that, but neither the trustee NOR the grandchild can deviate from the provisions of the trust itself without extensive expensive legal action. If the grandchild decided he wanted a full distribution of the IRA, the trustee would not allow it and neither would the IRA custodian who also maintains a copy of the trust. The IRA custodian would require a court order to do anything that was contrary to the original trust provisions which became irrevocable at your death.
Again, there is basically no difference whether the IRA agreement includes the “trustee of the trust” or just the name of the trust as beneficiary. It is understood that the trustee of the trust is acting manager of the trust and the only person who can request IRA distributions. The only linkage between the trust and the IRA custodian is that the trust(ee) has the rights under the IRA agreement of a beneficiary, ie a non individual beneficiary. The trust has no other authority, and if the trustee of the trust chose to move the IRA to a different custodian, he could do so providing the trust did not contain language to the contrary.
This is a layman’s description. Bruce Steiner could explain this better or add to it, including NJ specifics. Ambiguities that might arise are more likely to reflect the trust provisions rather than variations in the naming of the trust as beneficiary on the IRA agreement.
Permalink Submitted by Bruce Steiner on Wed, 2012-01-18 23:42
Alan’s description is excellent.
After the IRA owner dies, the IRA becomes an inherited IRA for the trustees. In IRA language, the trustees are the “beneficiary” rather than the “owner.” But this distinction deals with contributions and distributions. The trustees will control the IRA. The trustees can take distributions as they wish (except of course they have to take the required distributions each year). The custodian won’t know what the trustees do with the distributions. Of course, the trustees have to follow the terms of the trust agreement.
The lawyer should be able to prepare the beneficiary designation.