Inherited IRA’S titling & trust as beneficiary potential issues
Newby to trusts and IRA’s here. My mother passed away last month leaving 3 Traditional IRA accounts to me and my sister. Her largest account named the trust as the beneficiary, and the other 2 IRA’s have us listed as beneficiaries. My main question is about titling the IRA’s on these beneficiary applications, plus I’m hoping for a little clarification on the trust IRA.
Regarding the IRA’s where we are listed as beneficiaries: Is it necessary to title the IRA to include my mothers name, ie: IRA FBO of ‘my name’ as beneficiary of ‘moms name’ or similar verbiage? Are there tax implications if NOT done like this or what is the reason? In looking at the IRA application, I cannot see how I am able to fill it out in that format as it asks only for first and last name OR entity name for the new account.
Regarding the trust IRA, she has some funds is her account classified as “retirement” and some as “non-retirement” so the custodian sent us 2 different type forms. For the retirement funds: the custodian is only allowing us to cash out OR select the 5 Year Rule. I’m assuming this is because they don’t offer it, not because we can’t take the 10 years to deplete the account, correct? In which case we could change Custodians I suppose. For the non-retirement funds, we give them the trust info and the Trustee info and that seems to be it. There is no indication of what our options are with the funds after this. Do you have any cautions or suggestions regarding what to pay attention to when filling these applications out?
I saw on this website when searching through the FAQ’s “Can I name a trust as the beneficiary of my IRA?” The response was strongly worded against moving the assets into the trust OR retitling the IRA into the name of the trust because the funds could be taxed or it would no longer be an IRA. Why not? My mothers IRA name includes her trust AND her trust is named as the beneficiary. Is there an impact on us at this point with the way she set up this account to stay in her trust?
Permalink Submitted by Alan - IRA critic on Mon, 2021-11-22 14:01
Sorry to hear of your loss. IRA custodians have some variations in titling inherited IRAs, but they are all acceptable to the IRS. The common requirement is that the name of the beneficiary and the name of the decedent must be included, but in no particular order. The simplest example would be “Monica as beneficiary of (mother’s name)”. For the trust inherited IRA, the name of the trust replaces the name of the individual beneficiary.
For the trust inherited IRA, the investments in the IRA are all retirement funds, but the trust might also contain non retirement assets from other accounts. The RMD requirements differ depending on whether thet trust is “qualified” for look through to the trust beneficiaries or not. Most trusts are qualified, but the final requirement is that the trust beneficiary details must be provided to the IRA custodian no later than 10/31/2022. If the trust fails for some reason, the 5 year rule applies is mother passed prior to 4/1 of the year following the year she would have reached 72. Otherwise, her remaining life expectancy applies. If the trust is qualified, in most cases (disability or chronic illness of a beneficiary excepted) the 10 year rule will apply with no annual RMDs, but the IRA must be drained by 12/31/2031. The trust provisions must be honored by the trustee. Is the trust to continue or can the trust assets be transferred directly to the two of you as trust beneficiaries? This might be more convenient for you, but does forfeit creditor protection in most states. If you choose and are allowed to request the assignment of the IRA out of the trust, then you each will have your own inherited IRA, but this will not change your RMDs. For more detail, if the attorney who drafted the trust can be reached, more detail regarding the intent of the trust, qualification for look through, etc could be clarified. As for investments in the IRA, they often depend on who selected those investments. Quite often these investments turn out to be high expense investments which generated high commissions for a broker or life agent, particularly if a bank is the IRA custodian. You can only move an inherited IRA by direct trustee transfer to avoid an irrevocable taxable distribution, so be sure not to check a box that refers to a distribution. While many custodians prefer to make a taxable lump sum distribution, they do not have that authority with an IRA. The reason for this is that some custodian do not really want to maintain inherited IRA accounts because they are wasting assets subject to RMDs and possibly legal issues. Many of these custodians also resist cooperating with an assignment letter from the trustee of the trust, even though they know full well that the IRS has approved these assignments for many years. Again, do not be pushed into a distribution from the IRA as the custodian may attempt this.
One exception to the above is the completion of mother’s 2021 RMD if she did not complete it before passing. While this RMD should be completed by year end, it is typical that for deaths late in the year that the estate issues are not clear for awhile, so these year of death RMDs often are not completed until the following year. In such cases, the IRS will almost always waive any penalty with a properly filed Form 5329 after that RMD has been completed. You, sister, or the trust could complete this RMD in any combination desired. One of you may need funds more than the other.
You indicated that the trust is included with mother as the IRA owner? This is not allowed, since a trust cannot own an IRA, however if this is a “trusteed IRA” which wraps a trust and the IRA together there is an exception. You need to determine if this is a trusteed IRA. They are fairly rare, but if you have one consult with that trustee. Do not be forced into any distributions (direct transfers are OK and not taxable) without first understanding the entire picture because there is no recourse to lump sum distribution taxes if a distribution out of the IRA is made. Distribution of the IRA itself out of the trust is OK as long as no funds are distributed out of the IRA itself.
The above are generalizations, and the trust inherited IRA provisions are not real clear at this point. Therefore, you need to determine the facts before acting. Who is the trustee of the trust?
Permalink Submitted by Monica Adams on Tue, 2021-11-23 02:02
Thank you for your fast response.. it’s truly appreciated as I feel like I am in over my head a little bit. My older sister is actually the Trustee.. I know these are technically her duties but she is less comfortable with them than I am.Regarding moms Trust IRA, someone was able to explain the diff accounts to me today. She has 2 sources of funds at this particular firm, one of which is the retirement portion that lists the trust as the beneficiary but NOT as the owner, and the other is her non-retiriment fund that lists the trust as the owner with no other designated beneficiary. This firm is requiring 2 different applications for the each of the funds, with us needing to select our distribution options for the retirement funds and the for the non-retirement funds, it appears to be a basic ap where we provide the trust into and trustee info. I honestly have no idea what happens with the non-retirement money once it’s transferred into the trust account. Is this effectively a cash fund, or how do we withdraw it?You asked Is the trust to continue or can the trust assets be transferred directly to the two of you as trust beneficiaries? I believe the ability to transfer assets out to us was my moms intention. There is a section in her trust that states: “When each beneficiary reach the age of 25, the Trustee shall distribute to each such beneficiary 100% of the balance of the principle of his or her share of the Trust Estate.” At the time the trust was drawn up, neither of us were 25 yet. Ok so do not be pushed into a distribution.. got it. But we may be stuck with the Custodian terms which means they may not let us deplete the account over 10 years correct? An then an option would be to trustee transfer funds into a new IRA account elsewhere? As far as the RMD, she had NOT taken it yet for this year. It shouldn’t be a lot.. a few thousand maybe. Can you explain what you mean by “Distribution of the IRA itself out of the trust is OK as long as no funds are distributed out of the IRA itself.” ? Do you mean retitling and moving into our names instead of leaving in the trust? Would the advantage to this be individual access to the funds rather than relying on Trustee, or are there more benefits (or disadvantages)? Sorry for all the questions.. I’m so thankful for this site!