Trust as Roth IRA Beneficiary
A 90-year-old woman passed away and listed her trust as beneficiary of her Roth IRA (valued at 120k). Her four adult children are beneficiaries of the trust and the trust seems to qualify as a designated beneficiary.
Can the trustee of the trust just request a disbursement of the funds to be split equally to the four beneficiaries of the trust, or does the IRA need to be put into an Inherited IRA titled to the trust, and then a disbursement request can be made by the trustee? (This scenario assumes all the beneficiaries are ok with just liquidating the account and taking their share.)
If one of the four beneficiaries wants to maintain her share of the proceeds inside the Inherited IRA for the next 10 years, can the trustee transfer just that sibling’s 25% share into a separate Inherited IRA FBO the other sibling? If so, who controls when money can be disbursed from that sibling’s Inherited IRA?
Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2021-12-14 21:46
Qualification of the trust for look through is meaningless if the trust or individual beneficiaries of the trust all want lump sum distributions. The Roth custodian will likely establish a beneficiary Roth for the trust initially and could request distributions to the trust to pass through, but the trustee also assign the inherited Roth account to separate inherited Roth accounts for each beneficiary and let them take their own distributions. This Roth is likely qualified and totally tax free, but if distributions are made to the trust, they still must be reflected on the trust return, even if non taxable. Assignment to inherited Roths would prevent that. Of course, the beneficiaries are passing up 10 years of tax free Roth earnings by taking a lump sum distribution. The beneficiary that has their own inherited Roth will have total control of the investments and the timing of any distributions over the next 10 years. These beneficiaries can be handled differently, but any distributions made to the trust will have to be reported on a 1041.
Permalink Submitted by Jonathan Sard on Wed, 2021-12-15 13:46
Thanks Alan! Will the distributions from the Inherited Roth IRA have to first flow to a regular trust account and then to the beneficiaries, or can the distributions be made directly from the Inherited Roth IRA to the beneficiaries?
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-15 15:48
If the trustee of the trust can assign the IRA out of the trust to the beneficiaries, then the distributions can be made directly to those beneficiaries, and not to the trust. The Roth custodian will probably not allow this without the assignment, but the trustee of the trust could ask them. The Roth custodian would likely ask for a copy of the trust distribution requirements to make sure that the trust allows the beneficiaries to cash out.
Permalink Submitted by Bruce Steiner on Sun, 2021-12-26 17:30
What does the trust say? Does it divide into four separate trusts? If so, do the trustees have discretion to distribute the trust assets to the beneficiaries? Or does it require immediate distribution (which wouldn’t make sense since in there would be no purpose to paying the IRA to a trust that requires immediate distribution.