IRA
We have a client with a large traditional IRA and her attorney is preparing a lifetime standalone IRA trust that she is going to designate as the beneficiary of the IRA.
Upon her death, the terms of the IRA trust provide that the IRA bifurcate into two separate shares to be held in separate accumulation trusts for each of her two adult sons for their lifetimes.
Because her sons are not disabled or chronically ill, the IRA needs to be paid out within 10 years of the client’s death; however, the assets will remain in trust for the beneficiaries for their lifetimes.
The question is, if the Trustee decides to distribute the RMD’s in years 1-10 to the trust beneficiaries, will the RMD be taxed to the trust beneficiary and not the trust?
We are wondering if there is a way to avoid the RMDs being taxed at the trust level.
Any advice would be greatly appreciated.
Thanks
Permalink Submitted by Norman Cook on Sat, 2022-01-29 14:55
ALL withdrawals from a traditional IRA is tax as ordinal income — unless it was taxed $ when the contribution was made which is not common. Does the trust have its own tax ID different from the beneficiary S/S number? If so withdraws from the IRA would be taxed to the trust. However, distributions from the trust to the beneficiaries will pass part of this tax to the beneficiaries when a K-1 is filed at year end. Note the tax rate for trust are very high.
Permalink Submitted by William Tuttle on Sat, 2022-01-29 15:25
Attorney drafting the trust should know the tax implications. Otherwise the client should get a trusts and estates attorney who does.
Depending on trust design, distributed trust income can be taxable to the beneficiaries and retained trust income taxable to the trust.
There are no RMDs, the IRAs only need to be fully paid out by 12/31 of the 10th year following death. However, yearly distributions would likely be far more tax efficient.
The trustee should be cognizant of both the trust’s potential taxation of retained and the beneficiary’s potential taxation of distributions.
Permalink Submitted by Bruce Steiner on Sun, 2022-01-30 18:08
If it will all be paid out, what is the purpose of the trusts?