Trust or Beneficiary
Hello-
Client is 70. Currently leaving their Traditional IRA to a trust that benefits their sister (72) and nieces and nephews (late 30s to early 40s). No special needs concerns. If the primary concern is tax flexibility/optimization, would it be better to name their sister and nieces and nephews directly as beneficiaries as opposed to a trust that benefits them?
Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2024-01-18 02:54
Yes, the control of a trust as beneficiary comes with higher taxes and less flexibility. If we assume that this trust will be qualified for look through and client passes after his RMDs have begun, the 10 year rule will apply and the annual RMDs in years 1-9 will be based on the oldest beneficiary (sister).
If the individuals are named directly, the sister is an EDB that can take LE RMDs and avoid the 10 year rule, although if client lives past 80, the sister’s LE will not be longer than 10 years anyway. The others will be subject to the 10 year rule, with annual RMDs based on their own age.
If the trust provisions allow it to be dissolved by the trustee, the RMD requirements to the beneficiaries will be the same as if the trust was not dissolved. There isn’t much sense in leaving an IRA to a trust that can be terminated by the trustee.
If the trust inherits, the annual RMDs will have to be paid to the trust and either will be accumulated in the trust at the higher trust marginal rates, or will be passed through the trust on Forms 1041/K 1 after which taxes will be paid by the trust beneficiaries that receive the trust distributions.
Therefore, the client needs to determine what benefits are provided by the trust. There will be creditor protection, but only while the funds remain in the trust. When distributed to the beneficiaries there will no longer be creditor protection for the distributed funds.