Roth IRA beneficiary 5 year old son OR Trust

Submitted by Aaron Kanahele on Tue, 2016-04-26 22:57

Hello All:

im currently in the process of funding my revocable living trust.

I have a Roth IRA, Traditional IRA and Term Life Policy with the current beneficiary being my 5 year old son today. I was instructed by my Estate Planning Attorney to change the beneficiary to the “trust”.

One of the key aspects of my trust is to regulate the amount of money my son would get when he turns 18, 21, 25 and 30. I don’t want him to receive a large sum of money on his 18th bday for obvious reasons.

Ive been getting different advise from different people on the tax implications and best practices for those that are in this position. Some of these are advising not make the trust the beneficiary.

Has anyone here dealt with this situation and can you please help advise on the best route to proceed. Id like to avoid losing the gains on the IRAs and paying unnecessary taxes by setting this up the wrong way.

Thank you in advance for any and all help.
Aaron



Submitted by Ben Meyer on Wed, 2016-04-27 23:42

  • In order to regulate the disbursements to your son at various ages over 18, making a trust the beneficiary of your IRAs might actually be a good approach, assuming that the terms of the trust are carefully constructed.  The trust should be structured to have it qualify as a see-through trust with your son as sole beneficiary.  The trust will receive the distributions of your IRAs and insurance following your demise and will accumulate the payments within the trust until the time comes to make distributions to your son as beneficiary of the trust.  The trust will need to be kept open, and will need to pay income tax on any income at high trust tax rates.  Therefore, it would be a good idea to convert your traditional IRA into a Roth IRA to minimize the amount of trust income tax.  This way, the only source of taxable income to the trust would be earnings on previously retained RMDs.  The trust could also provide that earnings would be distributed annually to a custodial account for your son.  This would have the effect of replacing trust tax rates on the earnings with personal tax rates.  Also assumed is that the Roth IRA has achieved 5-year qualification and that RMDs will be tax-free deposits to the trust.  The advantage over simply using a custodial account for all funding sources is that having a trust will allow you specify ages of ultimate distribution over 18 or 21, such as 25 or 30 as you suggest.  You can also permit trust distributions for such things as college expenses if you wish. 
  • All of this is just a broad sketch, which needs to be validated for your individual circumstances, state law, and estate tax considerations.

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