Ownership Where a Trust is the Beneficiary

Submitted by Bob Foland on Mon, 2014-06-09 21:57

My client wants to establish a trust for each of her three grandchildren where the trusts will be beneficiaries of her IRA in order to keep her grandchildren from having outright ownership and access to the funds at age 18. Her attorney has drafted language that says “retirement funds such as 403(b) accounts, individual retirement accounts and other such pretax vehicles will become assets of this trust.” It raises the question in my mind as to the ownership of the IRA when my client dies. Does the trust, in fact, own the 403(b) or IRA? Can a non-natural person own an IRA for the benefit of the grandchild-beneficiary, or does that language trigger a taxable distribution because this retirement account is not owned by a living, breathing person?



Submitted by Alan - IRA critic on Mon, 2014-06-09 22:40

The trust will only have beneficial ownership of the inherited IRA, but still allows the trustee of the trust to manage the IRA according to the terms of the trust. The trust document will determine whether the RMDs will be passed through to the trust beneficiaries or accumulated in the trust and taxed at the higher trust rates. The IRA distributions are only taxed when distributed from the IRA to the trust, but if the trust is not qualified for look through treatment, the IRA may have to be fully distributed in 5 years.

Submitted by Peggy Fisher on Thu, 2014-06-12 15:48

Alan,If “the individual retirement accounts and other such pretax vehicles will become assets of this trust”, doesn’t that then make them available for payment of estate debts and expenses?  Which then makes the trust a beneficiary?

Submitted by Bruce Steiner on Fri, 2014-06-13 01:25

No, since (assuming they’re properly drafted) they’re payable to the grandchildren’s trusts, not the estate.  See my article on trusts as beneficiaries of retirement benefits in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.kkwc.com/docs/AR20041209132954.pdf 

Submitted by Rudy Zarling on Tue, 2014-10-07 15:50

Grantor passed away age 62, spouse predeceased him. No children Three named beneficiaries of trust, brother, sister& sister in law.RMD bassed on age of eldest beneficiaries. What happens when last trust beneficiary dies? where does the money go?

Submitted by Alan - IRA critic on Tue, 2014-10-07 17:31

The trust provisions should address that. The RMD will continue to be distributed using the same divisor that the oldest beneficiary would have used had they lived.

Add new comment

Log in or register to post comments