Trust Tax on Roth Earnings in a Revocable Living Trust

Submitted by Ed Ricketts on Wed, 2024-01-24 02:46

I wish to leave my Roth IRA to my granddaughter. I understand that the only way I can do so with spending constraints and limitations is to name my Revocable Living Trust the beneficiary. I want my granddaughter to continue earning (accumulate) as much as she can during the 10 years after I pass. But, I have been told that continued earnings within the Trust, if left in the Trust during the 10-year period, are subject to income tax at the trust rate.

If the earnings are subject to income tax (especially trust tax), I am not anxious about losing up to 37% of the earnings. Therefore:

1. Are my premises correct?

2. Is there a way to will my Roth IRA to my granddaughter, with instructions and limitations as to the money’s use, without taxes accruing to the earnings?

Thank you!



Submitted by Ed Ricketts on Wed, 2024-01-24 02:52

Any comments?

Submitted by Alan - IRA critic on Wed, 2024-01-24 03:53

There won’t be any earnings in the trust from the inherited Roth if the Roth is not distributed until year 10. The earnings will be generated in the Roth IRA which will be fully qualified by that time, if not already fully qualified.There are no RMDs in years 1-9 of the 10 year rule from an inherited Roth IRA. However, you will have to make sure that the trust is qualified for look through or the 5 year rule will apply. Of course, the Roth will have to be drained in year 10, so if those funds are to accumulated in the trust beyond 10 years, then subsequent gains will be taxable.

Submitted by Ed Ricketts on Wed, 2024-01-24 14:54

Thank you, Alan. I obviously don’t know how to articulate my question, so let me try a redically shortened version: Are earnings of my Roth (in my RLT) during the 10-year period after my death subject to taxation? 

Submitted by Alan - IRA critic on Wed, 2024-01-24 15:28

  • No. But any gains generated after the Roth is distributed to the trust will be, so the solution is not to distribute the Roth to the trust until the end of the 10 years OR distribute the Roth to the trust only if that distribution will be passed through the trust to the beneficiary. 
  • In other words, earnings generated in the Roth IRA will never be taxed, but if the Roth is distributed to the trust and that money is held in the trust before distributing it to GD, any subsequent gains on the funds will be taxable. This should only be an issue after the 10 year period expires and the Roth must be distributed to the trust and that money is held in the trust instead of being passed through to GD.

Submitted by gautam shah on Wed, 2024-01-24 16:58

GOOD explaination. how roth ira will be held for 10 years after death? whose name it should be converted at death and will trust which was revocable is now irrevocable how ROTH IRA fund will be transfered to trust and by who?

Submitted by Ed Ricketts on Fri, 2024-01-26 03:19

Let me reiterate. I want to greatly limit my GD’s access to my Roth during the 10 year period, after my death, that the Roth is in the Living Trust. The Roth is invested well. I assume that it willl accumulate a whole lot of money, that I want my GD to receive, if only I can limit her dipping into the Roth. There WILLL be a lot of gain during the 10 years. How do you suggest that I keep the gain made during the 10 years from being taxed? Thanks!

Submitted by Alan - IRA critic on Fri, 2024-01-26 04:05

I have answered this question twice now. See my post on 1/24 above. 

Submitted by Ed Ricketts on Fri, 2024-01-26 15:06

Sorry, for being so dense, but really I cannot make sense out of your answers. I really do not think you answered the question, let alone had a solution. Sorry about that.

Submitted by Alan - IRA critic on Fri, 2024-01-26 15:21

If you want all funds in the trust to be tax free, the money must remain in the Roth IRA until the end of year 10, then distributed to the trust and immediately out of the trust to the trust beneficiary. That eliminates any funds sitting in the trust unless they are still in the Roth. Accumulation trusts typically result in higher taxes at the trust rate unless distributed out to the beneficiary annually, so using a trust to control to hold the funds from the beneficiary comes with a tax cost. This trust taxable income is avoided as long as the funds remain in the Roth IRA, but they can’t stay in the Roth after 10 years. Therefore if taxes are to avoided, the trustee of the trust will have to distribute the funds out of the trust as soon as the trust receives the full distribution from the Roth IRA.  Of course, if the trust has other assets in addition to the Roth IRA, earnings from the other assets will also be taxed at the trust rate if the trust does not distribute them annual to the beneficiary. Therefore, there is a trade off in taxes if the beneficiary does not receive trust earnings annually. The trustee of the trust is bound by the trust provisions, but you can have the trust drafted to allow the trustee to use discretion regarding distributions or even to terminate the trust.

Submitted by gautam shah on Fri, 2024-02-02 12:17

thank you can you leave ROTH IRA ACCOUNT FOR 10 YEARS OUT SIDE TRUST? will account need beneficiary to transfer at death? what is cost to draft such look trough trust to minimise grandchild to misuse fund when mature

Submitted by Alan - IRA critic on Fri, 2024-02-02 16:00

If the trust is not named as the beneficiary of the Roth IRA, it will not be inherited by the trust, and will go to whoever is named beneficiary. If no beneficiary, the estate inherits it subject to the 5 year rule. Trust drafting costs vary widely by the legal firm, the complexity, and by locality including the effect of any state laws.

Submitted by Bruce Steiner on Mon, 2024-02-05 21:40

Submitted by gautam shah on Mon, 2024-02-05 22:06

thank you both ALLEN AND BRUCE. Is it possible to have private consult and drafting appropriate documents and advise what exactly to do at my death. i have three children and each has one two and three kids. two of them do not need money third can use as cushion and all grandkids will have some from this before theire parents kicks in.

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