Conduit QTIP Partial Principal Substitution for IRA RMD to Spouse
Would a QTIP still qualify as a conduit QTIP if it
distributed to the spouse the entire MRD of the IRA,say $10,000,
which was greater than the income of the IRA, but did so by passing
along only $7600 of the taxable MRD to her plus $2400 of principal in
the trust and leaving $2400 of the taxable IRA MRD in the trust? This
way the trust could take advantage of the 15% federal tax bracket,
which is lower than the spouse’s tax bracket. If not, would it be
permissible to do in a ordinary QTIP? Thank you!
Permalink Submitted by Bruce Steiner on Sun, 2013-03-31 21:47
It would still qualify, but it wouldn’t get the desired tax treatment. The $10,000 of distributions would carry out income for tax purposes. The result would be the same in either a regular QTIP trust or a conduit QTIP trust. Note that there is a substantial income tax cost to leaving an IRA to a spouse in trust rather than outright. In exchange for control over the principal, the IRA owner gives up the opportunity for the spouse to roll it over, name new beneficiaries, get a much longer stretch, and possibly convert to a Roth. 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/bio.php?r=30.