SEP and ROTH with trust as beneficiary

Submitted by dan casey on Thu, 2015-07-30 13:23

This is the first time I’ve had a client die that had money in qualified accounts with a trust as a main beneficiary. When I transfer the SEP and ROTH into the trust account, is this a tax free event? There is no way that the money comes out of the trust all tax free…I’m confused. The custodian and lawyers are telling me that the accounts have to go into the trust.



Submitted by Alan - IRA critic on Thu, 2015-07-30 19:11

  • The trust is just the beneficiary, and distributions from the plan must be paid to the trustee of the trust. Trust information as required by the plan administrator must be submitted no later than 10/31 of the year following the year of death. It must be determined if the trust is “qualified” for look through treatment. If so, RMDs will be based on the oldest trust beneficiary including remainder beneficiaries. If the trust is NOT qualified, then RMDs are the same as for an estate, either the 5 year rule if client passed prior to RBD, or client’s remaining life expectancy if he passed on or after the RBD. Most trusts are qualified.
  • A qualified plan must provide a direct rollover to an inherited IRA, but only if the trust is qualified. If the 5 year rule applied in the plan, doing this rollover before the end of the year following the year of death, will preserve the stretch based on the age of the oldest trust beneficiary, and the 5 year rule is avoided.
  • Taxes are only due when distributions are made from the plan or from an inherited IRA. There is no tax due to submit required death cert or other info to the plan. When distributions are made to the trust, depending on the provisions of the trust, the distributions are either paid through the trust to the trust beneficiaries and reported via K1 on their personal returns, or if distributions are retained in the trust, then they are taxed on the trust 1041 at the higher compressed trust tax rates.
  • First step is to determine that the trust is qualified, since the options spin off that determination.

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