IRA Trust tax withholding

Submitted by Steven Visek on Tue, 2015-03-24 00:15

I am trustee for four IRA trusts(one for each of my three siblings and me). The trusts are governed by GA law. I live in PA. The beneficiaries(each trust has only one beneficiary) of two of the trusts are in PA, one in GA, and one in NC. I am wondering if I can and/or should withhold state and/or federal taxes from the RMDs(always in December per the trusts language), based on input from the beneficiaries as to their expected tax liability, and possibly make periodic distributions quarterly(for tax withholding only), or continue to just have no withholding and let the beneficiaries deal with making any estimated tax payments(or not and pay any penalty if they so decide). The first RMDs were paid out last December and so now we are each doing our taxes and so these questions have come up. It was our father’s intent that only RMDs be paid out, and made in December, and that is how the trusts are worded, but as trustee I have the latitude to make adjustments for the sake of practicality and good portfolio management. Thanks.



Submitted by Jose Morales on Wed, 2015-03-25 17:26

NC and GA have set percentages that must be withheld, if state withholding is chosen, but it is not mandatory.  PA is completely voluntary, including the amount of withholding.  Are the RMDs large enough to significantly effect the state tax reporting of the beneficiaries?  Do they want state tax withheld from their RMDs?

Submitted by Steven Visek on Wed, 2015-03-25 20:27

Thanks for the reply.  Yes the RMDs are very significant, boosting incomes by 20-40%.  The federal withholding is the bigger issue, though.  These Designated Beneficiary trusts are look through trusts, but as they have their own EINs, if I make modest quarterly distributions toward estimated taxes(with the entire distributions being withheld) and then the big distributions in December as our father desired, will the withholding flow through to the beneficiary of each trust toward their tax liability?  I don’t want the withheld tax money held under the trust EIN and then have to file a trust tax return(when the trust owes no tax) and then have to request a refund of the tax paid by the trust.  If convenient, I’d like to make this easier on my siblings and help them avoid having to make out-of-pocket quarterly tax payments(inconvenient for them and cash flow negative) when they won’t get the RMD until December.

Submitted by Alan - IRA critic on Wed, 2015-03-25 21:57

If the distributions are made to the trust, a 1041 must be filed even if the taxable income is passed through to the beneficiaries of the trust on a K1. If you request withholding, there is a way to pass the withholding credit through to the individual beneficiaries as well for the federal 1041, but each state may have different rules for state income taxes. I would ask whoever is filing the 1041 if they see any problem with this, and also ask them what the options are if one beneficiary wants withholding and another does not. The latter sounds like a potential source of error even if it can be done.

Submitted by David Mertz on Wed, 2015-03-25 23:40

Alan, are you sure that this federal withholding can be passed through to the beneficiaries?  The instructions for preparing Schedule K-1 indicate that the only withholding on a Form 1099 that can be passed through is backup withholding, and the withholding in this case would not be backup withholding.  However, I did see something (I think) that suggested that withholding on IRD could be passed through with the IRD, but I couldn’t find anything in the tax code or IRS documentation that substantiated that.  [Edit:  I found what I was referring to, advice from the IRS Chief Counsel, Memorandum Number 200644018, which indicates that any IRD passed though can be accompanied by the credit for the tax withholding.  That, however, disagrees with the instuctions for preparing Schedule K-1.]

Submitted by Steven Visek on Thu, 2015-03-26 08:19

Thanks, but my understanding is that the RMDs are not made TO the trusts, but FROM the trusts.  The inherited IRAs are each owned by Designated Beneficiary trusts, one for each of the four IRAs(each IRA has a different beneficiary).  The RMDs are sent from the IRAs directly to their respective beneficiaries, not to any trust.  Perhaps it’s semantics, and perhaps I am misunderstanding what you meant. 

Submitted by Alan - IRA critic on Thu, 2015-03-26 19:57

Perhaps this IRA is a “trusteed IRA” described below:

The trusteed IRA-An IRA may take one of two distinct legal forms: a custodial IRA (IRC §408(h)) or a trusteed IRA (IRC§408(a)). While both forms receive identical tax treatment, the trusteed IRA combines the asset-protection advantages of a trust with the ease and tax-deferral advantages of the IRA to create an effective, multifaceted estate-planning instrument. With this instrument, the owner creates a trust within the IRA to serve as the beneficiary of the IRA assets upon the owner’s death and directs a trustee to distribute assets in strict accordance with the owner’s guidelines. See: Trust Company of America is giving RIAs more weapons for free-wheeling.Because the beneficiary has no power to pull or redirect the funds, the investment advisor and trustee can be confident that they will retain the IRA assets both during the client’s lifetime and after the client’s death.Although the overall effectiveness of the trusteed IRA depends on the flexibility of the provider, clients may want to choose a trusteed IRA over a more-traditional IRA for many reasons:

Submitted by Steven Visek on Thu, 2015-03-26 21:34

Thanks.  It is not a trusteed IRA.  My father set up a Designated Beneficiary trust and the beneficary of his IRA was four DB trusts created under that trust.  These have all been set up and funded and we have each gotten our first RMDs, each based on our own life expectancy.  The way the trusts are worded, the minimum and maximum annual distributions are the same, the RMD amounts.  My Dad wanted to make sure distributions were stretched out as long as possible.  I am trustee of all four DB trusts.

Submitted by Alan - IRA critic on Fri, 2015-03-27 03:21

You have conduit trusts, but the IRA RMDs should be passed through the trust to the beneficiaries. You have the 1099R, so is the TIN on the 1099R the trust EIN as expected, or is it the beneficiary’s SSN? 

Submitted by Steven Visek on Fri, 2015-03-27 19:27

Thanks.  The 1099Rs have the EIN/TIN of their respective trusts, not the SS# of the beneficiaries.

Submitted by Alan - IRA critic on Fri, 2015-03-27 19:31

Then the trust must file Form 1041 reporting the IRA distributions to the trust. But if the trust passes the RMDs out to the beneficiaries of the trust, it will issue a K1 to each beneficiary and each beneficiary will report the K1 income on their respective 1040.

Submitted by [email protected] on Fri, 2015-03-27 21:31

alan, I need to repeat a question posted in a previous thread because I think you missed it, but it relates to this topic.  If the trust receives the income and retained it, I assume it would be subject to taxes at the trust rates.  When it distributes to the beneficiaries in later years, do they pay taxes on the full amount of the distritbution or just the gain since trust received it?  In other words, does the trust accrue a “basis” in the trust? thanks.

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