Roth IRA owner deceased, spouse trying to decide whether to disclaim spouses Roth IRA to trust or not…

Submitted by Carlos Lopez on Sun, 2019-08-25 18:49

I have a client who is 75. Her husband, who was age 78 passed away and owned a 730k Roth IRA. My client is the primary beneficiary of the Roth and the trust is contingent. She lives in Oregon which has state death tax. The clients have a joint revocable living trust preserving the OR state death tax exemption of one million dollars. My client has 3 adult children who are the beneficiaries of the trust after the surviving spouse (my client) dies. My client is trying to make a decision on whether to disclaim the Roth IRA, effectively making the trust the Roth IRA owner in order to ensure the Roth IRA is not subject to the Oregon state death tax in the future. My client is the primary beneficiary of the trust. The kids are the remainder beneficiaries. The trust includes the appropriate look through language. The goal is to reduce tax liabilities to the kids when mom dies. While the impulse is to have mom claim the Roth IRA as her own (no RMD’s, tax free growth), this may not be the best option considering that OR will tax the IRA at 10% on her death. As she could live for the next 20 yrs+, we are thinking of the idea of having her disclaim the Roth IRA and thus the trust would own it.

In this case, would the trust have to take RMD’s since the primary beneficiary of the trust is the surviving spouse? If so, what Date of birth would we use to determine the appropriate amount (deceased’s DOB, surviving spouse’s DOB?). Could the trust retain the RMD’s within the trust and not distribute them?

thanks! – HelponanIRA



Submitted by Alan - IRA critic on Sun, 2019-08-25 21:12

  • RMDs are based on the oldest trust beneficiary including remainder beneficiaries, and that would likely be the age of the surviving spouse. As long as the trust is not a conduit trust, it can accumulate the RMDs, and that would be the desired goal here. The surviving spouse is not considered a sole beneficiary, therefore the divisor must be reduced by 1.0 each year.
  • It is critical that the trust meet all the requirements for a look through trust, or the 5 year rule will be triggered.

Submitted by Bruce Steiner on Sun, 2019-08-25 21:42

  • Revocable trusts are common in California because probating a Will is more difficult in California, and joint revocable trusts are more common in California because it’s a commuity property state.  But revocable trusts are not common in Oregon since probating a Will in Oregon is not difficult, and joint revocable trusts are unlikely to make sense in Oregon since it’s not a community property state.  Did they buy a California form?
  • Since joint revocable trusts fit community property states but not common law states (states that aren’t community property states), you should look closely at the trust to see how it works.
  • Are there enough other assets to fill up the $1 million Oregon exempt amount?  If so, there’s no need to disclaim.
  • To the extent there aren’t enough other assets to fill up the $1 million Oregon exempt amount, she has to weigh the income tax benefit of rolling it over into her own Roth, deferring distributions until her death, naming new beneficiaries (if she lives long enough and her children have sufficient other assets she could leave the Rorh IRA to or in trust for her grandchildren and get a longer stretch, assuming the stretch remains available) against the possible additional state estate tax cost of including the Roth IRA in her estate.
  • If she disclaims, she could disclaim the increase in her interest in the credit shelter trust so it will go to or in further trust for the children and get a longer stretch.
  • Note that the Oregon estate tax rates begin at 10% but go up to 16%.
  • Are you the lawyer handing the estate, or her lawyer?  If not, what does he/she advise?
  • Bruce Steiner

  

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