Trust as beneficiary of Roth IRA
Unfortunately, we came across a case where a trust was named beneficiary of a Roth IRA. Luckily, it was n’t a huge account. The Roth owner died in Dec of 2011. I assume we just sit back for 5 years, then drain it into the trust. My question is does the account need to be transferred into an inherited IRA (John Doe, deceased, FBO John Doe Trust)? Or do we just leave it in deceased owners name and do not re-title?
Permalink Submitted by Bruce Steiner on Sun, 2012-11-11 16:46
We recommend that our clients provide for their children in trust rather than outright, to keep the inheritance out of the children’s estates for estate tax purposes, and to better protect against the children’s potential creditors, including spouses. The same reasons apply to IRA benefits as to other assets, assuming each child’s share of the IRA is sufficient to warrant administering a trust.
Assuming the requirements are met (in particular, that none of the accumulated IRA distributions can ever go to anyone older than the person whose life expectancy you want to use for the stretch), the trust can stretch the IRA out over the life expectancy of the oldest beneficiary of the trust.
If there’s a problem with the trust (in other words, if there’s some reason it doesn’t qualify for the stretch), there’s often a way to fix it. You may wish to consult with competent tax/estates counsel who can advise you as to how best to proceed.
For more on this, 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 .
Permalink Submitted by Alan Spross on Sun, 2012-11-11 18:32
If the trust is quaified, the stretch is based on the oldest trust beneficiary, but if it’s not (and cannot be fixed) the 5 year rule applies because the decedent is deemed to have passed prior to the RBD (because there IS NO RBD). With respect to a Roth not having an RBD, a non qualified trust or estate beneficiary is more costly for a Roth IRA than a traditional IRA since the decedent’s remaining life expectancy cannot be used for Roth RMDs.
If the trust is qualified, then the 5 year rule will not apply. For taxation purposes, taking life expectancy RMDs will rarely result in taxable income since the original 5 year holding period if not already satisfied will be satisfied prior to any earnings being distributed. If the trustee does not want to stretch the Roth, they should at least make sure that Roth taxation rules are considered prior to requesting large distributions before the Roth is qualified.
The title on the Roth IRA should be changed to show the trust’s beneficial ownership of the IRA, and if the trust is qualified the beneficiary information should be provided to the IRA custodian no later than 10/31 of the year following the year of the owner’s death. Submission of this information will usually result in the IRA custodian requiring the IRA to be re titled in beneficiary form. In other words, missing that deadline might result in the IRA custodian taking the position that the trust no longer meets qualification purposes for RMDs.