Traditional IRA Inheritance

Submitted by Mike Caldwell on Tue, 2018-12-18 16:00

Have a Traditional IRA, which if I pre-decease, will go to current wife, who is not the mother of my two sons. I want to make sure that when she passes that the balance of the IRA will go to my 2 sons. My attorney has suggested a testamentary trust (QTIP) so that she could receive the income but not be able to change the beneficiaries. Once she passes and assuming the 2 sons are still alive, once they receive whatever is left in the IRA, what choices do they have at that time? Can they wait to take distributions until they are 70 1/2 or do they have to start taking distributions immediately I am currently 70 years old so RMDs kick in this year if that makes a difference.



Submitted by BruceM on Tue, 2018-12-18 18:18

No one has responded  yet and I’m not an estate planning attorney, but with that caveat, let me offer this.I don’t believe retirement plans can be owned by a Trust. I mean, even if they could, the required income distribution would have to be at least the amount of the RMD, which would get progressively greater every year….unless the RMD is retrained and taxed to the Trust and a fixed % of the QTIP were distributed each year. However, a trust for the benefit of the beneficiary, usually a minor or spendthrift, can be named as a beneficiary if it meets certain conditions. And you don’t give the size of the IRA, but for small IRAs, creating trust documents can be expensive and may not be worth the cost.Most states, at least in my experience, will determine if the spouse must be the designated beneficiary unless the spouse disclaims this in writing. Otherwise, the IRA owner can designate beneficiaries as he deems fit. So in this case for example, he could designate 50%, go to current spouse and 25% each to two children….or whatever allocation the owner wishes. So at his death, after his own RMD was removed, the remaining IRA would be split up into 3 separate inherited IRAs titled in the name of the decedent FBO beneficiary and then transferred to the IRA custodian of their choice. Minimum distributions each year are required for beneficiaries, except for a spouse who elects to roll over the interited IRA into her own IRA and treat as her own.

Submitted by Alan - IRA critic on Tue, 2018-12-18 18:29

There are several trade offs for naming a QTIP trust as your IRA beneficiary. Control of where the remaining IRA assets go (children) if partially offset by loss of stretch for the children. If your current spouse is the oldest trust beneficiary including remainder beneficiaries, after she passes the children will have to continue her RMD schedule. Even if their shares are transferred to individual inherited IRAs, the RMD divisors that your spouse was using must continue, with such divisor being reduced by 1.0 each year. 

Submitted by Bruce Steiner on Sun, 2018-12-23 03:25

  • Teachfp:  it’s not particularly difficult or expensive to do this.  The trust may permit, mandate or limit distributions as desired, except in order to qualify for the marital deduction the spouse must be entitled to all of the income from the IRA and from the other assets in the trust.
  • However, as Alan pointed out, the stretch is limited to the spouse’s life expectancy.  From an income tax standpoint, if there are enough other assets, it would be better to leave some of the IRA to the spouse outright, or alternatively to leave the IRA to or in trust for the children and other assets in trust for the spouse.

 

  • Bruce Steiner

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