IRA beneficiary titling – trusts
Hello,
I saw a post that seems to cover what I am asking although I have a slightly different question. I am working with a client who is married with a young child. His spouse is the primary beneficiary for all of his IRA’s; [b]he wants to name his daughter (and any other issue) as the secondary beneficiary through a conduit trust since the daughter is a newborn [both because she is a minor as well as for creditor protection]. There is a provision in the Revocable Living Trust which states the following:
“Anything herein to the contrary notwithstanding, in the event that a trust created under Article V for a Beneficiary shall be named beneficiary of benefits under a qualified retirement plan or individual retirement arrangement described in Sections 401 to 408 of the Code, the Trustees may exercise any right to determine the timing and payment of such benefits subject to the rules for required minimum distributions (RMDs) under Section 401(a)(9) of the Code. All benefits so received by the Trustees shall be distributed to or for the benefit of the Beneficiary, and may coordinate with the applicable custodian that such payments are made directly to the Beneficiary by the custodian, as a conduit trust. My intent is for such trust to qualify as a designated beneficiary to preserve to the extent possible and practical a stretch payout of retirement benefits for income tax planning purposes, and the Trustees shall have the power to take the appropriate steps necessary to effectuate that intent.”
I have sent this language to the IRA custodians (3 of them) to make sure they would adhere to this provision. Additionally, I asked them (a) how the contingent beneficiary should actually be titled on the IRA’s and (b) to confirm that the creation of the conduit trust subsequent to the IRA account holder’s demise will be respected/allowed for purposes of RMD’s being stretched over the daughter’s life expectancy.
One of the custodians responded that they do not keep a copy of the trust, the trust would be listed as the beneficiary (e.g. Jane Smith Revocable Living Trust), and at the time of death the successor trustee and any advisors would be responsible for carrying out instructions of the trust and providing a letter of authorization regarding where the assets should go.
I would appreciate your feedback regarding this matter as I’ve reviewed Ed Slott’s Course Manual on this topic and have not been able to determine exactly how the contingent beneficiary should be titled in order to enable a Conduit Trust to be created (as provided for in the Revocable Living Trust) for the benefit of all issue.
Thank you.
J
Permalink Submitted by Bruce Steiner on Mon, 2012-12-03 22:00
Being a newborn is not a reason for a conduit trust. If asset protection is a concern, that would be a reason not to have a conduit trust. For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .
The custodian doesn’t care what the trust says. The custodian will take direction from the trustees.
Revocable trusts are overhyped and oversold, and in most cases (except perhaps in a few states) not necessary. Was there any particular reason for creating one here?
Permalink Submitted by David Hochstadt on Sat, 2012-12-08 20:01
Hi Bruce,
Thanks for your response. I will read the article you included although I did skim through the “Children’s Trusts” section where you note that, “Perhaps the most common situation in which the use of a trust is indicated for retirement benefits is when the participant intends to benefit a child.”
1. The Revocable Trust is being used to avoid probate (even though the $ cost in NJ is not large currently), provide privacy upon demise as well as a smooth and uninterrupted transition of the assets being operated and distributed at the grantor’s demise (e.g. providing liquidity rather than having to wait for accounts to be made available during the probate process).
2. Why wouldn’t the Conduit Trust offer asset protection in terms of solely providing distribution of the RMD’s each year – as compared with the contingent beneficiary being an outright beneficiary (not through a trust) being able to withdraw the entire account balance – and potentially having these funds subject to creditors? Wouldn’t the conduit trust offer a layer of asset protection?
Additionally, suppose the contingent beneficiary ends up getting some or all of the assets and she is a minor or a spendthift or has creditor issues or is getting married and ultimately gets divorced, etc. Wouldn’t it be preferrable for her not to have control over the account? Couldn’t a Discretionary Trust with complete trustee discretion be set up as an alternative in order to provide additional flexibility of distributions to the contingent beneficiary?
3. On a related note, the Revocable Trust references the Trustrees having discretion to pay debts and expenses of administrering the estate (“may” pay rather than “shall” pay) . Upon demise of the grantor, a stand-alone conduit trust should be created per the terms of the Revocable Trust. In Ed Slott’s review class, the section regarding the estate being considered a trust beneficiary due to the payment of final expenses and debts from the IRA – would this be applicable to the Revocable Living Trust or the stand-alone Conduit Trust created upon demise? In other words, would the inclusion of this language in the Revocable Living Trust (which contains a provision specifying the creation of a Conduit Trust for purposes of any retirement account) taint the Conduit Trust which would be established with respect to who the designated beneficiaries are?
Thank you for your time.
Permalink Submitted by Bruce Steiner on Sat, 2012-12-08 22:41
Probate in New Jersey couldn’t be simpler. While we often assist clients in probating Wills in New Jersey, you can probate a Will in New Jersey fairly easily without a lawyer. In most counties, the court clerks will even fill out the forms for you. While I don’t know the specifics of your situation, the likelihood that a living trust is appropriate for someone in New Jersey is probably less than 1%.
Privacy is rarely an issue. Most people’s Wills provide for their spouse and children in pages of legalese, and don’t say anything about the size of the estate. With the exception of Jackie Onassis, unless you’re both a prominent figure and your estate plan is unusual, the likelihood that the newspapers or your neighbors would be interested in your Will is minuscule.
In New Jersey, the executor can withdraw 50% of an account immediately, and can manage the investments with respect to the other 50% pending settling the New Jersey estate and inheritance taxes, and if need be, can apply for a tax waiver to free up assets.
The alternative to a conduit trust isn’t leaving the IRA outright, it’s leaving the IRA in a discretionary trust.
It’s possible to draft around the problems with an IRA payable to a revocable trust, but it’s easier to avoid them by not running the IRA through a revocable trust even in those (rare in NJ) cases where there’s a revocable trust.
Permalink Submitted by David Hochstadt on Wed, 2012-12-12 20:50