Trust as IRA beneficiary…Roth Conversion

Submitted by Gregg Miller on Tue, 2019-12-17 01:39

Hi folks,

Looking for some input.

Husband dies and leaves IRA in conduit trust with spouse as beneficiary.

Surviving spouse at age 75 uses single life expectancy minus 1 each year as divisor for RMDs. Because of this, RMDs are higher than expected causing issues with Medicare IRMAA penalties (much higher than expected)

If the traditional IRA is converted to a Roth IRA, does this stop the need for RMDs to continue? Does the trust (standard conduit trust) somehow force RMDs to continue or would the conversion itself allow for the RMDs to cease?

Any input would be most welcome.

Thanks, in advance!

SR.



Submitted by Bruce Steiner on Tue, 2019-12-17 03:51

  • A conduit trust for a spouse doesn’t have to reduce the denominator by 1 each year.  The spouse’s life expectancy may be recalculated.
  • That’s still not a good result from an income tax standpoint.
  • Does the trust allow distributions in excess of the required distributions?  If so, it may be possible for the spouse to roll over the excess above the required distributions and then convert to a Roth.  See my articles on this in the October 1997 issue of Estate Planning, https://www.kkwc.com/wp-content/uploads/2015/04/AR20050125164755.pdf, and the June 2015 issue of Trusts & Estates, https://www.kkwc.com/wp-content/uploads/2015/08/IRA-Rollovers-Making-this-option-possible.pdf.
  • This may require a private letter ruling.
  • Why didn’t the IRA owner leave the IRA to the spouse outright and other assets to or in trust for the remainder beneficiaries, or leave some of the to the spouse outright and some of it to or in trust for the remainder beneficiaries, or leave the IRA to or in trust for the remainder beneficiaries and other assets in trust for the spouse?  Unless there weren’t any other assets, there were probably ways to have planned the estate without destroying the stretch.
  • Bruce Steiner

Submitted by Alan - IRA critic on Tue, 2019-12-17 04:33

  • First, since the surviving spouse is the life beneficiary of the conduit trust, she is treated as a sole beneficiary. As such, the RMD divisor is recalculated each year and not reduced by 1.0. That would reduce the RMDs, but not by much.
  • The larger question is whether the trustee of the trust has the power to terminate the trust and assign the IRA to the surviving spouse. If that is possible, the spouse can roll it over to her own IRA or convert it to a Roth IRA. However, it is not clear whether the IRA can be assigned out of the trust.

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