Fiduciary return if Bene IRA is in a trust?
A beneficiary IRA was set up in the name of the trust. The IRA is the trust’s only asset, and the only income of the trust is the RMD. Surviving spouse, as beneficiary of the trust, is entitled to, and does in fact receive, all income of the trust. Can the trust be treated as a grantor trust, thus by-passing the filing of a fiduciary return, or do we we need to file the 1041? Also, will the distributions from the trust retain their character and be eligible for :1) NYS pension exclusion; and 2) the NYS subtraction for professional service corporation shareholders?
Permalink Submitted by Bruce Steiner on Tue, 2012-03-20 21:21
What is “the trust”? Do you mean “a trust”?
It can’t be a grantor trust as to the IRA owner since he’s dead, which must be the case if there’s a surviving spouse.
The required distributions are income for tax purposes, but not necessarily income for fiduciary accounting purposes.
It’s possible but unlikely (especially outside California) that it’s a grantor trust as to the spouse. That would be the case if she had the right to withdraw all of the assets of the trust. If that’s the case, she can roll it over into her own IRA. See my article on that subject in the October 1997 issue of Estate Planning: http://www.kkwc.com/docs/AR20050125164755.pdf
Permalink Submitted by Joseph Wild on Tue, 2012-03-20 22:50
Thank you, that is very helpful.
Permalink Submitted by mk foss on Tue, 2012-03-20 23:19
A trust cannot own an IRA but can be the beneficiary of an IRA. If it’s not possible to rollover the IRA to a surviving spouse as Bruce suggests Form 1041 would be required. The RMD would be calculated each year the paid to the trust, the trust would use the funds to pay necessary expenses and distribute the net income to the trust beneficiary. The trust should specifiy whether an IRA RMD is income or principal. If it doesn’t then you follow state law. The trustee should be careful to follow the income/principal split especially if the residuary beneficiaries are counting on receiving a lot of trust principal when the current beneficiary passes away. For example, if the state law says that 10% of the RMD is income and 90% principal – the trustee could be at risk if 100% of the RMD is distributed currently.