Living Trust vs. Testamentary Trust vs. IRA Trust
I’ve read that one should not leave an IRA to a Living Trust unless it includes language that qualifies the handling of IRA money separately upon receipt into an IRA trust. Without that language, it could lead to immediate distribution of the IRA for tax purposes. Is that true? If so, why is that different from a testamentary trust, which I’ve read in numerous places including this board, can be stretched over the lifetime of the oldest beneficiary of that trust? Can anyone explain the difference here? Is it just that a living trust often contains references to non-child beneficiaries like parents, charities, etc., or is there something else fundamental to a living trust that generally disqualifies it from holding tax-advantaged IRA funds? Thanks in advance for any thoughts here.
Permalink Submitted by Bruce Steiner on Wed, 2012-11-28 19:32
First of all, living trusts are overhyped and oversold, and in most cases not needed.
A living trust after the grantor’s death is more analogous to an estate. There are lots of problems with running an IRA through a living trust. Since there’s no reason to do it, there’s no reason for a detailed explanation of the potential problems.
If there’s some other reason to create a living trust, you could still leave the IRA to the particular beneficiaries of or the particular trusts under the living trust.
Permalink Submitted by Audrey Richard on Sat, 2013-02-16 12:28
hai..I suspect the reasons are other than to reduce costs. Absent court approval, attorneys’ fees for estates in California are limited to a statutory schedule. (Perhaps the advantage of the living trust is that it allows the attorney to charge more than the statutory schedule without having to get court approval.) The schedule for executors’ commissions in California is comparable to that in other states, and in any event the spouse usually won’t take a commission, children will usually decide whether to take commissions based on tax considerations, and unrelated parties or banks won’t serve unless they think the commission offered is sufficient. It’s generally not a good idea to limiting distributions to health, maintenance, support and education. We rarely do that. It results in additional costs to determine whether a desired distribution falls within the permissible categories. It’s also generally not a good idea to mandate that a trust terminate at a certain point. Our clients almost always provide for their children in trusts that need not terminate. That keeps the inheritance out of the children’s estates, and provides better protection against potential creditors, including spouses. Even if someone creates a living trust, he/she can leave the IRA to the trusts created under the living trust (for example, the marital trust, the credit shelter (bypass) trust, or the children’s trusts).
Permalink Submitted by Al Smith on Wed, 2012-11-28 21:53
Thanks for your comment:
While I don’t disagree with you in general, In CA, the high cost of probate makes a living trust more reasonable (not saying it’s the best option, but certainly one that many CA attorneys recommend based on the number of middle-to-upper class clients in CA that have them. They typically set up robust trust language for the case where assets would go to children, providing for the usual health, education, maintenance, support clauses and then rules for when the principal of the trust goes to the beneficiaries and the trust dissolves. In these cases, the husband/wife wills are usually simple pour-over wills to capture anything that didn’t get put into the trust during life and put it into the trust through probate (obviously avoided if the couple makes sure not to own anything outside the trust). This leaves an issue for retirement plan beneficiaries where the spouse is set as the primary beneficiary, but the contingent beneficiary could be:
1) The children directly or via UTMA – but this would bypass the rules of the trust that were put in place to make sure the kids don’t do something stupid at an irresponsible age.
2) The living trust – which causes the problems that I don’t fully understand (which is why I asked the original question)
3) A separate trust – which eliminates those problems that I don’t fully understand (which is why I asked the original question).
Given the above, and assuming you or anyone else doesn’t have the time/energy/desire to explain the difference between #2 and #3 above (no blame from me if that’s the case), can you point me to a resource where I might be able to learn more about it on my own? I’m not looking for reasons as to why #1 is the best option… just looking for personal education on the difference between #2 and #3. Again, I appreciate the time spent on any comments here.
Permalink Submitted by Bruce Steiner on Wed, 2012-11-28 22:03
You are correct that living trusts are common in California. I suspect the reasons are other than to reduce costs. Absent court approval, attorneys’ fees for estates in California are limited to a statutory schedule. (Perhaps the advantage of the living trust is that it allows the attorney to charge more than the statutory schedule without having to get court approval.) The schedule for executors’ commissions in California is comparable to that in other states, and in any event the spouse usually won’t take a commission, children will usually decide whether to take commissions based on tax considerations, and unrelated parties or banks won’t serve unless they think the commission offered is sufficient.
It’s generally not a good idea to limiting distributions to health, maintenance, support and education. We rarely do that. It results in additional costs to determine whether a desired distribution falls within the permissible categories.
It’s also generally not a good idea to mandate that a trust terminate at a certain point. Our clients almost always provide for their children in trusts that need not terminate. That keeps the inheritance out of the children’s estates, and provides better protection against potential creditors, including spouses.
Even if someone creates a living trust, he/she can leave the IRA to the trusts created under the living trust (for example, the marital trust, the credit shelter (bypass) trust, or the children’s trusts).
I think the best resource for this is my article on trusts as beneficiaries of retirement benefits, in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .
Permalink Submitted by Al Smith on Thu, 2012-11-29 15:40
Thanks again for your comments. Will read your article shortly.
Permalink Submitted by BRIJ SINGH on Mon, 2018-06-04 17:59
how to create a living trust so I can use.