Required distributions from a see-through trust

Submitted by Richard Scrivanich on Mon, 2017-03-06 21:54

Trust was named the beneficiary of an IRA owned by the decedent. Trust is a qualified see-through trust. Trust has been taking RMD’s since decedent’s death. Trust requires 20% of the trust be distributed out to beneficiary at age 30. Trust has no other assets other than the IRA. In order to meet the required trust distribution but to avoid incurring taxes on the IRA (other than the RMD) can the trust do a trustee-to-trustee transfer to a decedent’s IRA fbo the beneficiary and have the transfer qualify as tax free (again, withdrawing the RMD prior to the transfer)?



Submitted by Alan - IRA critic on Tue, 2017-03-07 16:35

Does the trust instrument allow the trustee to terminate the trust?  If so, the inherited IRA could be assigned to the trust beneficiary, but the money already in the trust would have to be distributed to the beneficiary. If the trust has been paying tax on the accumulated distributions, proper trust accounting would not result in any double taxation when distributed out of the trust.

Submitted by Ben Meyer on Wed, 2017-03-08 05:47

  • It looks like the trust requires that 20% be transferred to the beneficiary “free of trust”.  This implies that the funds must also come from the IRA that is titled to the trust, unless adequate funds are held in non-IRA trust accounts.  But such non-IRA funds may not exist if the only trust asset is the IRA and if the trust has been acting as a conduit for RMDs.  
  • If a transfer is made to another IRA owned by the trust but denoted as “FBO Beneficiary”, it doesn’t sound like the direction of the trust instrument has been followed, since the funds will still be trust property.  If the beneficiary is the surviving spouse, a 60-day rollover to an individual IRA might be possible for funds in excess of the RMD.  Otherwise, it appears that a distribution is required of the 20%.  
  • If a total transfer is made of the IRA to an inherited IRA (less the RMD), the question arises of whether the directions of the trust have been followed, since the trust seems to require a distribution.  A partial transfer to an inherited IRA doesn’t seem to be compliant to the IRC and regulations.  The specific wording of the trust document will also be critical here.  Also in this case, the benefits of the trust will be lost (spendthrift, creditor), which may be contrary to the directions or intentions of the trustor.
  • So in this situation, the trustor intended to be generous in providing for a 20% distribution when the beneficiary reaches age 30.  But the trustor apparently didn’t consider the tax implications and the loss of stretch.

Submitted by Bruce Steiner on Wed, 2017-03-08 17:05

Why not distribute 20% of the inherited IRA in kind?  While mandating distributions is generally not optimum (it throws the distributed assets into the recipient’s estate, and exposes it to the recipient’s creditors and spouses), it won’t cause any adverse income tax consequences.

Add new comment

Log in or register to post comments

Sign up to receive The Slott Report each week