Inherited Roth from Trust w/Multiple Beneficiaries wanting separate control

Submitted by Lynn Keay on Tue, 2013-12-24 07:24

My 80yr old father passed away. His Roth listed his Living Trust as the beneficiary. The Trust has 3 adult children as equal beneficiaries and is qualified for Look-through treatment on RMD from what I understand (instead of using the 5yr rule). I am the successor Trustee. The custodian wants me to either take full distribution to the Trust and liquidate the Roth or transfer it to a single inherited Roth for the benefit of the Trust Beneficiaries. We are all nearly the the same age so ambivalent about using the oldest beneficiary’s age for RMD. But we each want to manage our own accounts going forward based on individual needs. How can we separate control? I don’t want to keep the Trust going simply for the Inherited Roth, nor do I want to manage my siblings’ share but we do want to invest assets using Roth tax benefits as long as possible.



Submitted by Alan - IRA critic on Tue, 2013-12-24 16:23

  • Sorry to hear of your loss. You must observe the provisions enumerated in the trust. If they allow for termination, you can assign the IRA to the beneficiaries out of the trust and each beneficiary can have a separate inherited Roth IRA with RMDs based on the age of the oldest trust beneficiary. If any beneficiary has creditor exposures or a potential divorce, they may want to keep their share in the trust to protect against creditors, but of course that would continue your trustee duties.
  • The custodian appears to be unnecessarily limiting your options. If they refuse to allow separate inherited Roth accounts, talk to a higher level staffer and/or review the beneficiary clause in the IRA agreement to determine what it says. If all else fails, you can still transfer the IRA to another custodian who will agree to set up the individual accounts.
  • Note that your father’s 2013 RMD needs to be completed if he did not do so.

Submitted by Lynn Keay on Fri, 2013-12-27 19:35

Thank you very much and yes he already took his RMD for 2013 (appreciate the reminder).  The custodian requires a court order or private IRS determination letter to separate into Inherited Roth accounts for each beneficiary.  That would take quite a bit of effort/time. I think the IRS “separate account” rule is unclear to the custodian as it applies to Roth.  The rule pertains to taking RMDs using individual ages rather than when using eldest and it is more pertinent to taxable IRA.  Nonetheless, they are firm (without the court order or IRS letter) about the options to either open an Inherited IRA for the Trust or else transfer to a different custoidan.  Does it make sense to begin with an Inherited Roth for the Trust with current custodian (Schwab) then transfer it to another custodian who will separate to three Inherited Roth accounts (for the benefit of Beneficiary) with RMD based on eldest age?The trust was intended to be terminated once all personal assets were distributed.  None of us is concerned about creditor exposure or divorce. 

Submitted by Bruce Steiner on Tue, 2013-12-24 22:25

Why would he leave his IRA to a trust than ends immediately upon his death?  If he wanted his children to get it outright, he could have named them as the beneficiaries.  If he wanted his children to get it in trust, he could have left it to trusts for their benefit.  That would have kept it out of his children’s estates, and protected it against his children’s creditors and spouses.  That’s particularly beneficial for a Roth IRA since the trustees need not be concerned about the trust’s income tax rates on the distributions.Alan is correct.  The trustee can distribute the inherited Roth IRA in kind.

Submitted by Lynn Keay on Fri, 2013-12-27 20:34

Thank you for your comments.  The primary Roth IRA beneficiary was not updated after mom passed away.  The Trust was the secondary beneficiary.  The custodian likely advised set up this way for simpliciity and dad didn’t know the importance of updating his beneficiaries or making them separate and distinct.  Two live in CA and one in NV.  I’m not sure whether those states are protected from creditors or spouses.  The Trust was originally intended to protect from inheritance taxes (N/A) and probate.  Trust assets were meant to be distributed equally to his 3 adult children upon death then terminate the trust.  He updated his regular IRA with three beneficiaries but not his Roth, figuring it wasn’t a tax issue I suppose.  Hopefully I can at least get three Inherited accounts for the Roth and not have to take it out of Roth in order to close the Trust.

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