IRA distributions to trust
Special need trust was the beneficiary of decedent’s IRA; primary beneficiary of the trust is now deceased and trustee wishes to terminate the trust and distribute all assets to the secondary beneficiaries. Investment advisor to the trust has been told that IRA distributions to the trust will be taxable to the trust EVEN IF they are subsequently distributed to the beneficiaries in the same taxable year. Why would subsequent distributions not carry the income out to the beneficiaries? Instead of liquidating the IRA, could beneficiary IRAs be set up?
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-01 19:39
The advisor is incorrect. The trust reports the IRA distributions as income, but then gets a deduction for for the distributed income (DNI) on the trust return. Recipient beneficiaries receive a K 1 and must report the income on their own returns in a convoluted procedure involving Sch E. SNT was likely qualified for look through treatment and the annual RMDs were probably based solely on the age of the SN beneficiary. With the 2020 RMD waiver there was no year of death RMD if SN beneficiary passed in 2020, but if they passed in 2021, the year of death RMD will have to be completed in any proportion by the remainder beneficiaries. This can be done after inherited IRA assignment, if desired.
The SNT was likely pre Secure Act, but upon death of the SN beneficiary after 2019, the remainder trust beneficiaries will become subject to the 10 year rule. But the trust provisions likely provide for termination after SN’s death, and if the IRA custodian cooperates, the trustee of the trust could assign the remaining funds to separate inherited IRAs for the remainder beneficiaries.
Permalink Submitted by Bruce Steiner on Mon, 2021-02-15 01:30
The investment advisor was told is passive voice. Who told him/her?
It’s not relevant what someone told the investment advisor. The remainder beneficiaries, or ideally the continuing trusts for the subsequent beneficiaries, aren’t taxable until they take distributions.
Bruce Steiner