QTIP trust as IRA beneficary
Client (over 70 1/2) is considering using a QTIP trust for his IRA. It is his second marriage. He wants the current wife to have the income and his kids from his first marriage to inherit the IRA after wife number two passes.
After the client passes and the second wife inherits she starts taking the RMD’s based on her life. Can she take more then the RMD’s? and wipe out the entire IRA leaving the kids from the first marriage with nothing?
Permalink Submitted by Alan - IRA critic on Tue, 2013-10-29 17:17
She should not be able to have the trustee remove MORE THAN the highest of the internal income of the IRA or the RMD. The younger the 2nd is at client’s death, the more likely that the IRA income will exceed the RMD. See the following article by Bruce Steiner on trusts as IRA beneficiaries. Scroll to the section on QTIP trusts, and overlook the estate tax unified credit amounts as they have changed: http://www.kkwc.com/docs/AR20041209132954.pdf
Permalink Submitted by mk foss on Tue, 2013-10-29 23:44
We should encourage Bruce to write another article. The exemption equivalent/unified credit amount has changed and in addition, the IRS issued a Revenue ruling (2005-36) relating to QTIP trusts as IRA beneficiaries. When the surviving spouse passes away, the children of the first marriage who are trust beneficiaries take RMDs based on the life expectancy of the survivor as determined the year after the original IRA owner died. That could be a very short time period.If the survivor is young, the QTIP could be fully distributed before the survivor passes away even if the RMDs are calculated correctly.Another issue pointed out in Bruce’s article is that there is a difference between trust income and taxable income. If the taxable income is greater than the trust income, it is easier for the trustee to distribute too much to the survivor. That problem might not be discovered until the survivor passes away.
Permalink Submitted by Bruce Steiner on Wed, 2013-10-30 23:24
Not that much has happened. Revenue Ruling 2005-36 deals with a glitch in some states’ laws defining income. Some states that had that glitch have fixed it. To be safe, I would include a provision in the Will to override the glitch in those states that still have it. The QTIP trust as beneficiary makes sense occasionally, mainly where control over the principal is important, and the spouse will need substantial distributions anyway, so you wouldn’t otherwise be able to take advantage of the stretch. I’m less worried about a trustee paying out too much. The lawyer handling the estate should go over the trust with the trustee upon the IRA owner’s death. You should look to see whether there’s some other way to accomplish most of your objectives, so as to preserve the stretch, either by leaving the IRA to the spouse and other assets to or in trust for the children, or the IRA to or in trust for the children and other assets to or in trust for the spouse. Keep in mind the spouse’s elective share rights. If you’re not comfortable dealing with this, you might consider bringing in co-counsel.
Permalink Submitted by mk foss on Thu, 2013-10-31 03:53
It would still be great to have an updated article on this subject. Tell Trusts and Estates that folks are clamoring for it.
Permalink Submitted by Peggy Fisher on Thu, 2013-10-31 15:07
“She should not be able to have the trustee remove MORE THAN the highest of the internal income of the IRA or the RMD.”Is this goal accomplished by adding a paragraph to the trust?
Permalink Submitted by Bruce Steiner on Thu, 2013-10-31 18:30
I’m on the advisory board of Trusts & Estates, so I have some input. Do enough IRA owners leave their IRAs to a QTIP trust for it to make sense? Ignoring state estate taxes with exempt amounts lower than the Federal exempt amount, there aren’t many estates large enough to need a marital share, and where there’s a need to have the IRA available to the spouse but not go directly to the spouse.
Permalink Submitted by mk foss on Fri, 2013-11-01 22:00
In a second marriage situation, the QTIP trust is often used for retirement benefits. QTIP trusts have become more popular with portability because they allow for a step-up in basis that’s not available to an exemption trust; of course there’s no step-up with the IRA but there are many more QTIP trusts, I believe.
Permalink Submitted by Bruce Steiner on Sat, 2013-11-02 23:20
The IRS is reviewing this issue, but under Revenue Procedure 2001-38 a QTIP election that’s wholly uncessary to reduce or eliminate the Federal estate tax may not be valid.