IRA to QTIP Trust to Remainder Trust
How would an IRA be treated by a remainder beneficiary of a QTIP Trust after the Grantor’s spouse dies? The trust states that upon the death of the Grantor’s wife, all existing assets of the QTIP Trust, including any IRA, be left to the son in the form of a Remainder Trust. The spouse had been taking the RMD’s based on her life expectancy from the single life table reduced by one for each succeeding distribution year. Would the son continue doing the same based on her life or could he somehow use his life expectancy to stretch it out? Or does he possibly have to take one large distribution and end the life of the IRA?
Permalink Submitted by mk foss on Tue, 2013-03-26 21:46
The RMDs are still based upon the life expectancy of the Grantor’s spouse as of the year after the IRA owner died. The factor continues to reduce by 1.0 each year. The beneficiary IRA will now have a new beneficairy. The IRA would not end unless the trust agree specified that it was to be cashed in upon the death of the initial beneficiary. After a title change, you just keep doing what they were doing previously.
Permalink Submitted by Alan - IRA critic on Wed, 2013-03-27 00:06
Bruce and Mary Kay,1.401(a)9-4 appears to convey to beneficiaries of qualified trusts the same options as if the trust beneficiaries were designated beneficiaries. This would include the sole spousal beneficiary options of not starting RMDs until decedent would have reached 70.5 and also the recalculated RMD divisors. I did not find anything that would exclude a QTIP trust from these options notwithstanding the limitations to distributions to the surviving spouse. If this is correct, the surviving spouse could have delayed RMDs until 70.5 which could then have confered designated beneficiary status to the remainder beneficiary OR if this were not applicable due to the age at death of IRA owner, the surviving spouse could have recalculated the RMD instead of using the 1.0 reduction. And if the latter was the case, the remainder beneficiary of the trust could reconstruct what the correct divisor for the surviving spouse was, and start their own 1.0 reductions from the corrected divisor instead of the non recalulated divisor that the trustee has been using. What do you think?
Permalink Submitted by Harold Porter on Wed, 2013-03-27 02:30
Yes, it would certainly be an advantage for the remanider beneficiary to reconstruct what the correct devisor for the surviving spouse should have been and start their own 1.0 reductions. Can I assume this scenario is rare based on your wording and not something you have come across, therby puting it in a very ‘grey’ area? If so, the question remains what the chances are of it being disallowed and incurring a stiff penalty vs the potential gain? The IRA is valued at $300,000 and the devisor would be 7.6 vs 3.1
Permalink Submitted by Alan - IRA critic on Wed, 2013-03-27 03:24
Let’s wait to see what Bruce Steiner or Mary Kay Foss have to say about this. They usually check in on trust related issues.
Permalink Submitted by Harold Porter on Thu, 2013-03-28 03:06
No reply yet Alan.
Permalink Submitted by mk foss on Sat, 2013-03-30 21:37
There are a couple of approaches here. The trust for the spouse can qualify for the option that would allow deferral of RMDs until the IRA would have reached age 70.5. But this is a QTIP trust, so there are income distribution requirements. Natalie Choate has an extensive discussion of how you can comply with income distribution requirements based upon the language in the Trust and Rev. Rul. 2006-26 (see Life and Death Planning for Retirement Benefits Chapter 3). My thought is that with a QTIP trust, RMDs start the year after the owner’s death and that the remainder beneficiary uses the survivor’s final RMD factor and reduces it by 1.0 each subsequent year. Natalie suggests that amounts in excess of what the spouse would have been required to take before age 70.5 could be rolled over to a separate IRA of the survivor but that doesn’t solve the current problem. Whenever you name a trust rather than the spouse outright the distributions come out faster than if the spouse was named directly because you lose the ability to rollover and switch to the uniform table.
Permalink Submitted by Alan - IRA critic on Sat, 2013-03-30 21:57
Mary Kay, any thoughts about the surviving spouse being able to recalculate RMDs (single life table each year rather than a 1.0 reduction) as allowed for a sole spouse beneficiary? And if so, the successor beneficiary could start with a divisor that reflected the divisors that actually applied to the surviving spouse rather than what the surviving spouse actually used? This question would apply whether there was a trust beneficiary or not, but there are no IRS Regs addressing it.
Permalink Submitted by Bruce Steiner on Sun, 2013-03-31 01:15
See Treas. Reg. §§ 1.401(a)(9)-5 A-5(c)(1) and (2) and A-7(c)(3) Examples 1 and 2.The general rule is that, assuming the trust otherwise qualifies, the spouse would be the oldest beneficiary, so the trust would use her life expectancy, reduced by one each year, both before and after her death.However, in the unlikely event that the spouse was entitled to all of the IRA distributions during her lifetime, even if they were more than the income, then she would be considered the sole beneficiary during her lifetime. In that case, her life expectancy would be recalculated each year during her lifetime, and after her death the trust would begin with the spouse’s life expectancy as of her death (as if she hadn’t died).This illustrates the substantial income tax cost to leaving IRA benefits to a trust for the benefit of the spouse instead of leaving them to the spouse (or to or in trust for the children, or part to the spouse and part to or in trust for the children).The above is not intended as legal advice. From the facts presented, we do not know if the trust otherwise qualifies for the stretch. The original poster should consult his/her own attorney, who can give him/her specific advice based upon the particular terms and provisions of the trust, and whether the other requirements for the stretch are met.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.