IRA Trust

Submitted by Bob Lloyd on Wed, 2018-01-10 18:12

The beneficiary of my Roth and Traditional IRAs is an IRA Trust. They will be the only assets in the trust with our two children as beneficiaries.
My understanding is the only federal income tax responsibility will be to the beneficiaries as the receive their RMDs and the trust itself is not subject to tax.Is that correct and does the new tax law change anything in that respect?



Submitted by William Tuttle on Wed, 2018-01-10 19:25

I will make some basic statements pending Alan’s/Bruce’s correction/amplification. It will depend on the type of trust, the terms of the trust and the actions of the trustee.

  • Your statement will generally be true if the entire RMDs are distributed to the beneficiaries.
  • The trust distributions will likely be subject to the Kiddie Tax.
  • The tax reform modifies the trust tax brackets in a similar manner to the personal tax brackets.
  • If the trust so allows, it may make sense to retain some or all of the RMDs in the trust.
  • Depending on the size of the RMDs and the parent’s marginal tax rate, if may make sense taxwise to retain at least some of the RMDs in the trust and have the trust pay the taxes.
  • There are many other reasons to retain RMDs in the trust and pay the taxes.
  • The bottom line is that this is not such a simple answer and others may provide the details.

    • Submitted by Alan - IRA critic on Wed, 2018-01-10 19:38

    By chance is this a “trusteed IRA”?  Your use of the term “IRA Trust” triggered this question.  These are trusts appended to the IRA agreement of a major firm where the firm will not only be the IRA custodian, but also the trustee of the trust. There are some differences between trusteed IRAs and the more typical case where a trust is simply named as the beneficiary of an IRA held by any legal IRA custodian.

    Submitted by Bob Lloyd on Wed, 2018-01-10 22:34

    The IRAs are currently in Vanguard accounts and name the trust as beneficiary. My daughters are the trust beneficiaries. Without other more specific wording does this qualify as a “trusted IRA?” And if not what are the consequences? Thanks for your comments.

    Submitted by Bruce Steiner on Wed, 2018-01-10 22:45

    Assuming the trust is drafted to provide flexibility, the trustees can decide each year, based on whatever factors they deem relevant, how much (if anything) to distribute and how much (if anything) to retain.

    Submitted by Alan - IRA critic on Thu, 2018-01-11 00:08

    It wouldn’t be a trusteed IRA. Just a normal trust beneficiary situation. Most such trusts are qualified for look through treatment whether it is a conduit trust or accumulation trust. That means that the oldest beneficiary would determine the applicable RMD distribution period. The trustee of the trust may have discretion regarding the trust distributions but as long as the RMDs are distributed to the trust beneficiaries personally, the distributions will be taxed at each individual’s marginal rate. If the RMDs are accumulated in the trust, they they will be taxed at the higher trust rates. You should check with the estate attorney who drafted the trust if you have questions regarding it’s operation.

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