Irrevocable Trust Assets
Do assets in an irrevocable trust typically not receive a step-up in basis at death?
What rules apply if the assets in the Irrevocable Trust were ROTH IRA’s inherited by the parent’s child? Would those assets including earnings maintain their ROTH tax free status as they were distributed to the Irrevocable Trust and then to the child? What rules apply if any or all of those ROTH assets were left to accumulate in the Trust until the end of the 10 year period?
The Roth IRA ordering rules still apply whether distributed to the trust or directly to the beneficiary. The Roth is qualified once 5 years have passed from the year the Roth owner first made a contribution. Qualified Roth IRA distributions made to the trust do not require a Form 8606 to be filed with the trust 1041. If the Roth distributions are passed through the trust to the beneficiary they will remain tax free to the beneficiary and reported only line 4a of the beneficiary’s 1040. If the Roth distribution is accumulated in the trust, subsequent gains on the distributed Roth funds will be taxable when distributed from the trust. Therefore, it still makes sense to leave the inherited Roth untouched until year 10 since all gains generated while still in the Roth will be tax free.
Permalink Submitted by Alan - IRA critic on Mon, 2023-02-27 21:25
Correct, there is no basis adjustment.