IRA under a trust

Submitted by carlos mendez on Thu, 2020-10-29 14:16

When someone passes away and leaves behind an IRA with the trust as a beneficiary, what’s the most tax-efficient way to distribute the proceeds?

Permalink Submitted by Alan - IRA critic on Thu, 2020-10-29 22:57

The trustee must adhere to the trust provisions, which often are contrary to tax efficiency. Within the limits of the provisions, typically the longer the applicable distribution period, the more tax efficiency there is. The Secure Act has curtailed tax efficieny in most cases when the 10 year rule applies, since 10 years is shorter than most life expectancies. If the trustee has discretion to do so, it might be tax efficient to distribute according to the beneficiary’s annual situation, ie distribution more in a year in which the beneficiary has limited income or high itemized deductions. If the 10 year rule applies and the beneficiary’s income is stable year to year, then typically the distribution should be about the same each of the 10 (or 11) years when the 10 year rule applies.
Accumulation trusts generally substitute control for tax efficiency. Distributions retained in the trust are subject to the much higher compressed trust tax rates. Trustee may not have a choice but to accumulate the IRA distributions.