Taxation of IRA with Trust as beneficiary

Submitted by Scott Breunig on Thu, 2019-04-18 16:17

TP had a living trust. TP (per broker) listed Trust as beneficiary. TP passed on 1/9/18.

What “entities” pay tax on IRA liquidation per death? Is it “passed through” to trust beneficiaries without taxation by trust? Just shown as distribution.

Can.. it be taxed on Trust 1041? Then passed onto trust beneficiaries in nontaxable distribution? Is there a “basis” issue, if beneficiary IRA distribution is mixed with other assets in trust?

Yes, all this has happened.



Submitted by Alan - IRA critic on Thu, 2019-04-18 17:15

The provisions of the trust determine whether the IRA distributions are accumulated in the trust, passed through to the trust beneficiaries, or the trustee might have discretion to make that decision. Generally, the IRA should not be liquidated. If the trust is qualified, RMDs from the IRA paid to the trust will be based on the oldest trust beneficiary’s life expectancy. The only basis in the IRA would come from the owner having made non deductible IRA contributions. Now, in this case if a lump sum distribution was paid and the trust reported the income and paid taxes at the high trust rate, then distributed to the beneficiaries, it sounds like a number of errors were made starting with accepting a lump sum distribution unless trustee was required to request same.

Submitted by Scott Breunig on Thu, 2019-04-18 18:06

There is nothing in the trust document about any specific asset.  Are you suggesting the trustee made a mistake or possibly the custodian?

Submitted by Alan - IRA critic on Thu, 2019-04-18 19:17

The IRA custodian normally will not issue a lump sum distribution unless the trustee of the trust requested it or agreed to it. Right there any stretch of the IRA available is lost, and either the trust or the trust beneficiaries are subject to a large tax bill. The next decision is based on the trust provisions. A living trust often does not have a specific purpose other than probate avoidance, and if the provisions do not restrict distributions to beneficiaries, it is possible that the trustee could even terminate the trust. Paying taxes on the trust 1041 and still passing through the IRA distribution to the beneficiaries instead if accumulating this income in the trust is suspect because the trust rates are much higher than most beneficiaries individual rates. Exceptions might apply if the IRA was very small or extremely large, or there might be some unique conditions that justify this treatment, but the beneficiaries should be provided with an explanation why the IRA was liquidated and why the trust paid these taxes instead of beneficiaries. A trust trustee that wants to distribute the inherited IRA in kind to the trust beneficiaries can usually assign inherited IRAs to each beneficiary, who can then stretch the IRA if they wish to control the taxable income for each year. They would also have full investment control of their individual inherited IRAs.

Submitted by Bruce Steiner on Sat, 2019-04-20 19:36

If the trustees cashed in the IRA, the beneficiaries may have a claim against the trustees for the lost benefits of the stretch.  

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