Mechanics of Conduit Trust as Beneficiary.

Submitted by Norman Cook on Tue, 2019-01-29 15:28

I am somewhat confused with the actual “mechanics” of how a stretched inherited IRA works with a conduit trust as the beneficiary. This is what I understand but I may very well be wrong. Please enlighten me.

1. Parent established a trust named “Parent IRA Conduit Trust” that becomes irrevocable at the death of Parent. This trust states that at his death the Parent IRA Conduit Trust will be divided into the following sub-trust. 50% to Child A IRA Conduit Trust and 50% to Child B IRA Conduit Trust .

2. The Parent informs Fidelity Investments that the beneficiaries of the IRA is ???? Parent IRA Conduit Trust or should the Beneficiaries be the sub-trust that is 50% to Child A IRA Conduit Trust and 50% to Child B IRA Conduit Trust ? Who is the correct beneficiaries, the original Parent IRA Conduit Trust or the two sub-trust? I do not understand the following statement :§ 06: The one thing that should never be done is to move all the IRA assets to the trust. ” Is this prevented by correctly titling the inherited IRA

3. I understand that correctly titled inherited IRAs must be set up for the trust beneficiary such as “Parent, deceased, IRA fbo Child A IRA Conduit Trust” and “Parent, deceased, IRA fbo Child B IRA Conduit Trust” each with a Tax ID number. I assume that the Trustee not Child A or B are the person that controls these IRA accounts. Am I correct? I assume it is OK to move the IRA assets into these accounts, but is not these accounts the trust accounts?????

4. The RMD are transferred from the Parent, deceased, IRA fbo Child A IRA Conduit Trust account to the Child A’s bank account.



Submitted by Alan - IRA critic on Wed, 2019-01-30 03:05

  • The trustee of the trust named as beneficiary of the IRA should be able to assign the inherited IRA to separate inherited IRAs, one for each subtrust. Each trust will have to meet the requirements for look through treatment to allow the beneficiary RMD to be based on the oldest beneficiary of each trust.
  •  Distribution from the IRA to one of the trusts will eliminate the stretch and result in the entire IRA distribuiton being taxable.  Therefore, if the stretch is desired each trust should only distribute the RMD for the applicable year to the trust and allow the rest of the funds to remain in the inherited IRA account.
  • For #3 you are correct except that amounts other than the RMD or needed distributions must remain in the IRA to defer taxes on the inherited IRA.
  • Each subtrust for each child must pass through the RMD to the respective subtrust beneficiary on Form K 1 issued to report the distribution according to the trust income tax return Form 1041 and cannot accumulate IRA distributions in the trust if they are conduit trusts. The child will then report the income distributed on their individual returns each year. 

Submitted by Norman Cook on Wed, 2019-01-30 15:29

I am still not clear on Who is the correct beneficiaries that should be listed with Fidelity — the original Parent IRA Conduit Trust or the two sub-trust?

Submitted by Bruce Steiner on Thu, 2019-01-31 03:19

Conduit trusts rarely make sense.  Over time they force out all of the IRA benefits, throwing them into the beneficiaries’ estates and subjecting them to the beneficiaries’ creditors and spouses, thus defeating the purpose of the trust.  It’s usually better to make the trusts fully discretionary.

Submitted by Norman Cook on Thu, 2019-01-31 03:45

1.  With the higher exclusion ($11.4M) on estates, few will have an estate tax problem. 2.  Does the higher tax rate (37%) on the Trust vs  22% or 24% individiual rate offset the creditor/spouses risk?

Submitted by William Tuttle on Thu, 2019-01-31 16:39

  • Why are you comparing the top trust tax rate to your personal marginal rate. For 2019 the first trust tax brackets are $0 – $2650 0% capital gains/qualified dividend tax rate and $0 – $2600 10% ordinary income tax rate. The second trust tax brackets are $2650 – $12,950 15% capital gains/qualified dividend tax rate and $2600 – $9300 24% ordinary income tax rate.
  • It could be tax advantageous to retain some earnings in the trust.

Submitted by Patricia Monat on Tue, 2019-03-19 19:10

Client’s sister named her revocable trust as beneficary of her IRA.  Her sole remaining benefiary in the trust is her sister.  Can we distribute out the IRA to her sister as the sole benefiary of the trust and keep it as an inherited IRA with all the tax benefits?  Or do we keep it as an inherited IRA with the trust as beneficiary and only distribute out the RMD each year to that beneficiary.  Thoughts?

Submitted by Alan - IRA critic on Tue, 2019-03-19 19:47

The trust provisions dictate whether it is possible to dissolve the trust or the trustee might have discretion to do that. If so, the inherited IRA can be assigned to the remaining trust beneficiary, although this can be a hassle with some IRA custodians. If the trust was qualified for look through treatment then the inherited IRA RMD distribution period will be based on the single life expectancy of that beneficiary.

Submitted by Bruce Steiner on Wed, 2019-03-20 01:59

  • Perhaps, depending on the terms of the trust.
  • But why did she do this?  Why didn’t she name either her sister or a trust for the benefit of her sister as the beneficiary of her IRA?
  • Bruce Steiner

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