Beneficiary Ira Trust Account-Best way to disburse with least tax event
My mother passed in August. She had her IRA rolled into a Beneficiary Trust Ira Account. (She was ill advised as she did not need to have it rolled into A Trust IRA.
I am trying to figure out the best way to distribute without a huge tax event for the beneficiaries. She had already taken the minimum withdraw for the year before she passed.
Also, I would like to not have to drag this out for the next 5 years.
According to the article that I read on your sight, if I leave in the Trust IRA we will be taxed at a much higher rate, but if I distribute before the end of the year, we would then pay as individuals.
My question is, is it best to do this, and if we do this are we able to use that money to contribute to our own IRA’s and receive the tax break there?
The amount of the Trust IRA is about $50,000 to be split 3 ways. So each of us would receive about $16,545.00.
Thank you for your time and expertise. I believe non of us are even close to a 36% tax bracket.
Jody Schlabach
Permalink Submitted by Alan - IRA critic on Tue, 2021-11-30 16:19
I think you mean that mother named this trust as the beneficiary of her IRA, so the trust inherited it when she passed. What are the terms of the trust, are there any restrictions that would prevent the trustee of the trust from distributing the IRA to the trust beneficiaries?
Most trusts qualify for look through to the trust beneficiaries, and this includes a requirement to provide the trust information to the IRA custodian by 10/31 of the year following the year of death. If the trust is qualified, then the 10 year rule generally applies. If the trust is NOT qualified for look through and mother passed prior to her required beginning date, the 5 year rule applies. If she passed after her RBD and the trust is not qualified, RMDs are based on her remaining single life expectancy.
RMDs are not eligible for rollover, but the money distributed can help the beneficiary afford to increase their contributions to employer plans and IRAs. Such contributions may offset the increased taxable income from the RMDs.
If the trust provisions permit, the trustee can assign the inherited IRA out of the trust to individual inherited IRA accounts for each trust beneficiary. If the trust does not allow this, and RMDs must be paid to the trust, they usually can be passed through to the beneficiaries and taxed at their individual personal tax rates. What do the trust provisions indicate?
Permalink Submitted by Jody Schlabach on Tue, 2021-11-30 19:03
Based on your explenation, the trust just says to equally disburse all assets in trust to beneficiaries (3). There are no restrictions keeping me from distributing to trust beneficiaries. My question is if I distribute all the IRA Money out now, will we be paying the tax at our individual tax rate, or will the Trust be taxed? RMD was already paid this year. I prefer not to drag out over the next 5-10 years.Thank you again. This is a very confusing situation.
Permalink Submitted by Alan - IRA critic on Tue, 2021-11-30 20:34
There is a difference between distributing the IRA out of the trust from taking distributions from the IRA itself. The trust apparently allows the trustee to assign the IRA out of the trust to the trust beneficiaries, and no IRA distributions need be taken until those beneficiaries have their own inherited IRAs and request their own distributions to be taxed at their personal tax rates.
If a distribution from the IRA is instead made to the trust, it must be reported as trust income on Form 1041, but the trust can still pass that income through to the beneficiaries on Form K 1 with the beneficiaries also being taxed at their individual tax rates.
The IRA distribution made to the trust would only be taxed at the higher trust rates if the trust retains those distributions.
Since the 10 year rule will apply if the trust is qualified, there is no requirement to make any distributions to the trust if the trustee intends to assign the IRA to the beneficiaries, but you should know that some IRA custodians do not cooperate with assignment requests from the trustee. If you have that type of custodian, you could transfer the inherited IRA to a more cooperative custodian.