trust beneficiary of an IRA
IRA owner dies having made a trust the beneficiary of his IRA. The trust distributions are to be made to nonspousal beneficiaries (his children), Trust distributions are limited to 6% of assets per year. Upon distribution, the Secure Act requires distribution in 10 years. Is the tax consequence of those distributions indicated on the 1941 K-1? Is the trust responsible for income tax withholding on those distributions?
Permalink Submitted by William Tuttle on Wed, 2021-01-06 16:11
If the trust needs to make trust distributions, it needs to make IRA distributions.
Just because the SECURE ACT requires 100% distribution within 10 years does not mean the trust must do so.
Generally trust distributed IRA distributions are taxable to the beneficiary. IRA distributions retained in the trust are taxable to the trust.
The most tax effective IRA/Trust distributions would likely be rather evenly over the 10/11 years based on individual and trust marginal tax rates.
Because of the above, this 6%/year is ill-advised for trusts as IRA beneficiaries. If there are also significant taxable assets it would probably be better to have separate trusts or distribution strategys.
I have limited trust/estate knowledge and this is not a DIY area. I’m sure trust/estate lawyers have been working on strategies since the SECURE ACT became law. You should definitely engage a trust/estate lawyer with the necessary knowledge, skills and experience. This is not a task for most family lawyers.