Naming Trust Beneficiary of IRA
Husband and wife have IRA’s. They are creating a Family Trust. Attorney told them they can extend the life of the inherited IRA’s farther if the Trust is the beneficiary rather than naming their two daughters beneficiaries. Please explain the beneficiary options for a Trust vs. naming the children directly.
Permalink Submitted by Alan - IRA critic on Fri, 2013-05-31 20:10
There may be advantages to the trust such as creditor protection, but the applicable distribution period of the IRA will not be lengthened. The trust will reduce the stretch when the parent passes. Even if the trust is qualified for look through treatment, the stretch is based on the oldest beneficiary of the trust. If the only beneficiaries of the trust are the children, the oldest child will determine the RMDs instead of each child being able to create separate accounts and use their own life expectancies. If the trust is not “qualified”, then the stretch is reduced to that of the remaining life expectancy of the parent, or if parent passes before the required beginning date, the 5 year rule will apply.
Permalink Submitted by Bruce Steiner on Fri, 2013-05-31 20:38
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 Julie Brangenberg on Tue, 2013-06-04 18:46
Would there be a benefit to naming the children as beneficiary of Spouse A’s IRA instead of Spouse B to provide more of a stretch for the children? Spouse A is 75 ; Spouse B is 78.
Permalink Submitted by Alan - IRA critic on Tue, 2013-06-04 19:33
If the children were only the designated beneficiaries on one of the spouse’s IRAs, to determine which IRA would result in more dollars being stretched, it would be a function of both the amounts in these IRAs now as well as how long each IRA will be drawn down in the parent’s remaining lifetime. If the surviving spouse will inherit the IRA not left to the children, will that spouse name the children as beneficiaries? If so, then the choice of IRAs does not make much difference if the parent’s distributions are limited to RMDs.
Permalink Submitted by Julie Brangenberg on Tue, 2013-06-04 20:07
They are considering putting the children as beneficiaries of all Spouse A’s IRA’s, which is about 65% of their liquid net worth, because Spouse B has limited vision and is 3 years older than Spouse A. If they choose to list Spouse B as Beneficiary of all Spouse A’s IRA’s and then designate the children as contingent, besides the RMD required by Spouse B, when Spouse A passes, would the stretch for the children be calculated differently if they receive when Spouse B passes, instead of receiving when Spouse A passes? They would still be able to stretch when both parents pass, based on their dob and the last living parent’s dob?
Permalink Submitted by Alan - IRA critic on Tue, 2013-06-04 21:01
If the surviving spouse assumes ownership of the inherited IRA and names the children as beneficiaries, the children will still get their life expectancy stretch when the second spouse passes. The danger is that the second spouse fails to assume ownership (or does not roll it over to their own IRA) and takes RMDs as beneficiary instead of as owner. If that were to happen, not only would the surviving spouse have larger RMDs while still living, the children would only receive a stretch based on the surviving spouse’s remaining life expectancy. Naming the children as contingent does not affect the children’s RMDs unless the surviving spouse disclaims the IRA or pre deceases the other spouse. In either of those events the children named as contingent would inherit the IRA and could use their own life expectancies.