Bequeath to charity from Beneficiary IRA owned by Trust
IRA owner passed away March 2021 at the age of 82. The individual owned an IRA account (~$800,000) and a NQ Rev Trust Account ($400,000). The primary sole beneficiary is the clients’ Trust. *not my client*
The trust reads: distribution of the trust, at death, 20% to go to one specific charity and the other 80% to be split 50/50 to the two adult children (one of which is my client – and the executor of the estate and the trustee of the trust).
While the accounts were with the deceased owners original advisor, the beneficiary claim for the IRA account was processed and transferred to the name of the trust, as a beneficiary IRA (with new EIN for trust).
When processing the 20% amount to to go the charity ($240,000), it was decided to distribute this amount from the trust owned Beneficiary IRA.
After this distribution was completed, the original advisor had the custodian split the Beneficiary IRA account 50/50 ($280,000 each), directly into the 2 adult beneficiaries name, so they could invest the funds, and distribute the Beneficiary IRA funds, however they wish.
Now, the old advisor is out of the picture and we are helping the two adult children/beneficiaries, and the family trust, plan ahead for 2021 tax liabilities.
I think naming the charity directly as a partial primary beneficiary of the IRA would have been cleaner and more tax efficient, but I’m no estate planner and defer to their expertise.
I’m fairly certain the IRA custodian will send a 1099R for the $280,000 distribution, with the Trust tax ID. My question is, will the $280,000 distribution from the Trust owned beneficiary IRA be fully taxed to the trust, or would/could it flow through in any way to the charity (tax exempt), since it was a named beneficiary of the trust? Or, would it flow through to the 2 adult kids? If it’s fully taxable to the Trust, is there any way to avoid the higher 37% trust tax rate?
Both adult beneficiaries are in their 40’s, so I don’t believe there is any QCD relief.
Lastly, the original IRA owner had not satisfied his 2021 RMD, so we want to make sure this is taken care of too.
Thanks in advance for any guidance.
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-25 01:30
Yes, the trust should get the 1099R for any distributions made to the trust or made directly at the request of the trustee of the trust. But it should also get a charitable deduction on Form 1041 to offset the distribution to the charity.
It’s not clear why the trust will not be qualified for look through, since the charitable beneficiary of the trust has been distributed and the charity has no remaining interest in the trust assets. The RMD rules vary based on whether the trust is qualified or not. If not qualified, the IRA must be distributed over the remaining single life expectancy of the decedent, which will be about 8 years starting in 2022. However, if the trust meets all the requirements for qualification, the 10 year rule will apply, meaning that the IRA must be drained by 12/31/2031 with no particular annual distribution required. So not a large difference in the max distribution period.
The 2021 year of death RMD for the IRA owner must be withdrawn by “any” beneficiary by year end. But the large charitable distribution already done should take care of the year of death RMD, so the individuals need not participate.
Assignment of inherited IRAs out of the trust does not change the RMD for those inherited IRA beneficiaries. They must individually comply starting in 2022 depending on whether the trust will be qualified or not. One of the requirements for qualification is to submit all required trust information to the IRA custodian no later than 10/31/2022. So it may not be clear to the individual beneficiaries until then whether they actually have a 2022 beneficiary RMD or not.
You are correct, due to their age QCDs are not an option to offset future distributions directly to the remaining beneficiaries of the inherited IRAs.