RMD from a Trust

Submitted by Peter Weisberg on Mon, 2016-01-25 16:42

2 part question.

An IRA owner dies and leaves the IRA to 2 Trusts as beneficiaries.
The first trust is a non-exempt trust with the original owners daughter as the beneficiary of the trust.
The RMD from the trust will be calculated based on the daughters life.
The 2nd trust is a non-exempt trust with also requires an RMD based on the daughters life.

The lawyer who set up the trusts told the daughter she could satisfy both RMDs from the non-exempt
trust, even though both trusts have separate tax ID#’s and both require an RMD.
I disagree and feel that both trusts should take RMDs so as not to confuse the IRS.

The same lawyer also said that if the Exempt trust does take the RMD, it can avoid paying the taxes
on the distribution, by passing it on to the daughter via a K-1. Again, I feel that the trust would be
the one to pay the taxes as they are the owner now of the IRA.

Any thoughts?



Submitted by Alan - IRA critic on Mon, 2016-01-25 19:51

  • If the trust provisions allow for passing the RMD through to the trust beneficiary, then the beneficiary will report the income on their personal return at their own rate. If the trust retains the income, then the trust will have to pay the taxes at the higher trust rate.
  • The other question does not have a clear answer. IRS Regs indicate an INDIVIDUAL (not an entity) can aggregated RMDs on IRA accounts inherited from the same decedent. The custodian cannot force out an RMD to an entity that does not request it, so the trustee could request that the entire RMD be distributed to a single trust. The gray area here is that the IRS Regs also state that a trust qualified for look through treatment can base the RMD distribution period on the oldest individual trust beneficiary, but it does not speficially say that the individual beneficiary of a qualified trust allows the trust to be treated as an individual for other reasons such as aggregating the RMD.
  • Other than the RMD, the attorney seems sure that there are no other considerations in the trust provisions that allow the IRA to be distributed solely to just one of the trusts?


Submitted by Bruce Steiner on Tue, 2016-01-26 04:10

  • You might consider applying for a private letter ruling, since it’s something you don’t have to do, but you’d do if you got a favorable ruling.  I’m not sure what the chances of success might be, but it may be worth the effort.

 

  • Obviously the amount involved is substantial if one trust is GST exempt and the other isn’t, since the GST exemption is equal to the estate tax exclusion amount (presently $5,450,000).

 

  • The GST taxable trust would make distributions to the daughter before the GST exempt trust, since the GST taxable trust will be subject to GST tax at the daughter’s death, but the GST exempt trust won’t be subject to GST tax at the daughter’s death.

 

  • There’s a tradeoff between making distributions to the daughter out of the GST exempt trust (which will probably save income taxes but will throw the distributions into the daughter’s estate and expose them to her creditors and spouses.

 

  • Why was the GST exemption allocated to some by not all of the IRA benefits?  Was either the IRA or the nonretirement assets more than the GST exemption?  (Depending on the daughter’s age, it might be advantageous to allocate GST exemption to the IRA since the deferral may outweigh the fact that the IRA is pre-tax whereas most nonretirement assets get a basis step-up at death?)

 

  • Bruce Steiner, attorney, NYC, also admitted in NJ and FL


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