I have a prospect who reached out to me because her two children (ages 11 and 15) were listed as the beneficiary on their grandfather’s $1mil account. He passed away in 2023 at the age of 75. My understanding is that since they are his grandchildren, not children, they are subject to the 10-year rule and will need to take RMD’s year 1-9 since he was already taking RMDs. The mother is listed as the custodian on the account due to the fact that they are minors. However, she is concerned because she wants this money to be in the Trust, and not available immediately to the children. I believe there are a few options but I want to be sure I am not missing something:

She can do a lump sum distribution of the funds. Yes, the tax implications will be significant, especially since they will be subject to the kiddie tax rules and she makes over $300k/year as a single taxpayer. But the money is now out of the IRA’s and can be put into a Trust. My question in this scenario is: does she have the right to create a Trust and restrict their access to the money now for when they do reach the age of majority? Additionally, when considering how this asset may impact their financial aid, could she put it in an irrevocable Trust (with payouts in later years) so it’s not counted as a student or parental asset when filling out the FASFA? Or would that not be allowed since technically it’s the children’s money and they shouldn’t be able to benefit from it down the line if it’s put in an IRR Trust?

Her other option is to take RMDs in years 1-9 and then do a lump sum distribution in year 10. In this case, she won’t be able to move as much of the money into a Trust (only distributions in years 1-3 for the 15-year-old, and 1-7 for the 11-year-old). But if they don’t go to school, their tax bracket at age 18 will theoretically be much lower than their mother’s current one. However, if they do become full-time students at age 18, they will be subject to the kiddie tax rules until age 24 and then there is no benefit in waiting to distribute the funds because having the money in the IRA’s will impact financial aid.

Is there another option that I am not seeing? Obviously, this is not an ideal situation so I feel as though the options are all bad.