Roth IRA and Special Needs Trust
I have a client with a sizeable Roth IRA conversion account who has included his daughter’s Special Needs Trust as one of his contingent beneficiaries. He is concerned since there seems no way to keep the Roth tax exempt status when a beneficiary payment is necessary due to his and his spouse’s passing. Is there some way to preserve the Roth tax features that we are missing?
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Permalink Submitted by Alan - IRA critic on Fri, 2015-03-13 18:15
That is not correct. The Roth will be tax free 5 years after the first contribution if it is inherited, regardless of the nature of the beneficiary. However, a Roth IRA also requires RMDs for beneficiaries except for a spouse beneficiary who assumes ownership.
Permalink Submitted by subhash malhotra on Fri, 2015-03-13 18:38
I was under the understanding that you could create a Roth IRA Trust in which the beneficiaries needs could be addressed. The Roth IRA Trust could specify the needs of the person with special needs and the IRA Trust retainns the Tax Exempt status and goes for ever, if there are funds in the Roth IRA Trust. I might be wrong but this is what I understand in talking to a lawyer.
Permalink Submitted by Alan - IRA critic on Fri, 2015-03-13 18:58
If a SNT is the beneficiary, it will generally receive the Roth RMDs tax free and the distributions can be accumulated in the trust if desired. However, the earnings generated on the trust assets will be taxed at the higher compressed trust tax rates. Therefore, the longer the funds remain in the Roth IRA due to limiting distributions to the RMD, the longer the earnings will be inside the Roth and tax free. However, the Roth RMDs will eventually drain the Roth IRA over the life expectancy of the SNT beneficiary (or remainder beneficiary if older). Therefore, the trust can last indefinitely but the Roth IRA cannot due to RMDs.