Trust as IRA beneficiary

Submitted by Jason Hochstadt on Wed, 2014-06-25 20:12

Hello,

When a trust is named as an IRA beneficiary (whether a conduit or accumulation trust), how much flexibility is there for the trust in terms of (a) may it be addressed within an IRA account owner’s living will and/or revocable living trust, to be established if applicable at the time of demise and if the trust is to be the primary beneficiary without a disclaimer or (b) must the trust actually be established now, while the IRA account owner is alive, even though the trust would not be in force until the account owner’s demise – assuming the trust is the primary beneficiary and there is no disclaimer?

As an example, within a client’s revocable living trust is a section dealing with a Beneficiary Trust and within the Trust Administration Article it references a conduit trust being established pursuant to the Beneficiary Trust Article to serve as the beneficiary of any retirement accounts of the account owner.

Thank you.

JH



Submitted by Bruce Steiner on Wed, 2014-06-25 22:10

You can put the trusts that receive the IRA benefits in the Will, or in a separate trust instrument.  It’s mainly just a matter of style.  I think it’s generally more efficient to put them in the Will, so as not to have to prepare a separate trust instrument, and to make sure that all of the provisions (except for the special requirements for trusts that receive IRA benefits) are identical to those for the trusts that receive the non-IRA assets.  Conduit trusts rarely make any sense.  They require that the distributions be paid out, thus throwing these amounts into the recipients’ estates, and exposing them to the recipients’ creditors and spouses.  For more on trusts as beneficiaries of retirement benefits, 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.

Submitted by Jason Hochstadt on Thu, 2014-06-26 17:06

Thanks, Bruce.  Understood regarding the conduit versus accumulation trust differences.  However, with the accumulation trust don’t you have the negative of hitting the highest marginal tax bracket after $12k per year of income plus the 3.8% investment income tax?  So you sacrifice paying higher income tax from the trust in order to gain the added asset protection since the distributions don’t need to be paid out of the trust – although the RMDs do need to be paid from the IRA to the trust and, therefore, there can also be phantom income to the trust along with the compressed marginal income tax brackets.  So, there would need to be available liquidity to cover these cash hits.  Thank you.

Submitted by mk foss on Thu, 2014-06-26 17:56

You’re correct that the highest tax bracket will be achieved with $12K of income and any capital gains from other sources within the trust will be pushed to a 20% capital gains rate. The only consolation is that the 3.8% investment income tax does not apply to IRA withdrawals. 

Submitted by Bruce Steiner on Thu, 2014-06-26 19:08

It’s not phantom income.  The distributions are taxable when received.  There’s a tradeoff between the asset protection benefits of a trust and the income tax benefits of making distributions to beneficiaries in lower income tax brackets.  The trustees can decide how much, if anything, to distribute each year, taking into account income taxes and anything else they think relevant.

Submitted by Zorian Pinsky on Sun, 2017-08-06 20:25

Me and my wife are beneficiaries of our IRAs. Now, we have our children as secondary beneficiaries. We also have Revocable Trust where, if we are incapacitated or deseased, our children, who are adult, listed as either trustees, and or beneficiaries of the trust. It was written in 2002.An attorney, who is helping us now to slightly revise some trust’s conditions per our request, is advising us to list the trust as a secondary beneficiary of our IRAs while vaugly explaining the reason. Here is what he wrote when I asked for advantage of listing the trust as secondary beneficiary vs. listing our children: “You are using your trust as the conduit for distributing your assets, so funneling your IRA money through it after you both pass away (as secondary beneficiary if spouse does not survive) follows the same plan.  The alternative is to use secondary beneficiary designations within your plan documents and that can be cumbersome.”Basically, if our children are listed as beneficiaries of the trust, what is the advantage of listing the trust as secondary beneficiary of IRAs vs. listing the children as the secondary beneficiaries? What are the RMD period consequences/advantage of the former one? Thank you.    

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