IF we leave a portion of our IRA to a child ex 5years old upon our passing as long as
the amount is below the standard deduction they will get it tax free if they file a return
any problem with this idea probbaly have to name a parent as a custodian for the child
what are the negatives
DIsregarding the complexities of the restored original kiddie tax rules, if the child is your child and inherits the IRA as a minor, the child is an eligible designated beneficiary who can stretch the inherited IRA by taking a very low annual RMD (approx 1.5% of IRA value) until after the child reaches majority when the 10 year rule kicks in. In other words, by the time the 10 year rule kicks in eliminating annual beneficiary RMDs if desired, the kiddie tax will probably no longer apply. Also, you indicated the child will inherit “a portion” of the IRA, meaning that the UTMA custodian will have to utilize the separate inherited IRA account rules to have the LE RMD calculated using only the age of the child. There are many variables that will effect the rate and amount of taxes that will be due annually. And if distributions are limited to the RMD only, there could be a very large lump sum distribution due at the end of the 10 year rule period.
I’ve named my Roth IRA beneficiary as my grandaughter, age 6. I mentioned this to my son who discussed with his trust attorney (California). The lawyer advised that having my grandaughter as beneficiary “would get complicated with courts and administration”. The lawyer’s advice was to name my Trust as the beneficiary and through an amendment to the Trust indicate that the intended recipient of the Roth IRA was to be my grandaughter. It is quite possible that neither my son nor his trust lawyer understand I have a Revocable Trust (and not some other trust form). I’d not thought through the idea that a minor could not own property, a point highlighted in @kastnna post. Everything I’ve read in this Discussion Forum, as well as in Mr Slott’s Newsletter and his website advise NOT to name a trust as the beneficiary of an IRA (except perhaps in exceptional circumstances). In my grandaughter’s case, I’d assumed her parents could manage the Roth IRA (on her behalf) if she were still a minor when she inherits. There are no special or exceptional family health or financial circumstances. Both my son and his wife are competent and financially savvy individuals. QUESTION: Am I creating unnecessary problems with having my minor granddaughter named the beneficiary? The notion “it would get complicated with courts and administration” doesn’t sound right to me. Is there something else I am missing?Thank you for any insights you’d be willing to share.
Permalink Submitted by Nathan Kastner on Tue, 2020-08-25 22:35
Lots of things to consider.First and foremost, your child, while a minor, can’t own property. The child’s guardian and/or conservator will oversee the money until the child reaches adulthood. If they do not have a conservator (and particularly if the guardianship is contested), the courts will appoint a conservator for you. The cost of the legal fees and the fiduciary bond will exceed whatever money you hoped to save in taxes. Second, the child likley will not be getting a standard deduction for filing a tax return. It’s almost impossible that the five year old provided more than half of their support, and thus they will be a dependent of someone else. That means the kid doesn’t get the big standard deduction you are looking for. No deduction means fully taxable. In short, I doubt that you’ll be able to accomplish what you are hoping to do without opening up a half dozen other cans of worms. Good luck,