IRA and Estate Planning

Submitted by brcwm on Mon, 2024-02-12 21:47

Client (Jane, Age 75) is re-doing her estate plan. Client has a daughter (Kathy, age 50s) who is a spend thrift, and a grandson (John, age 20s) who is trustworthy.

Estate planner is thinking a trust as a beneficiary. Client likes the idea of her IRA’s beneficiary to be a trust for the continued control of the funds after her passing. The trust would be for the benefit of her daughter, Kathy, with grandson John as the trustee.

1) I’m assuming the 10yr rule comes into play, and the trust qualifies correctly as a see-through. Conduit trust seems too risky of a proposition due to spendthrift, so an accumulation trust with flexible distribution terms seems better. Still would qualify for the 10yr rule right, and not be downgraded to the non-designated beneficiary 5yr rule?

2) Since there will be distributions from the IRA due to the 10yr rule, what happens if there is withholding done on the IRA, and then the net income is distributed. Where do those withheld funds go? Does it get refunded back to the trust, and then the beneficiary has to pay the taxes on the IRA distribution?

3) Can the Trust still pay for the taxes even if the IRA income is distributed to the beneficiary?

Thanks.



Submitted by David Mertz on Tue, 2024-02-13 00:24

  1. If the trust qualifies for look through, the 10-year rule will apply (unless Kathy is an EDB due to be disabled).  The 5-year rule will never apply because Jane is past her RBD for RMDs.  If the trust is not qualified for look through, the 10-year rule will not apply and distributions will be based on Jane’s life expectancy in the year of death which could result in RMDs spanning up to 15 years depending on Jane’s age in the year of death.  In some such a cases it might make sense to intentionally disqualify the trust for look-through by failing to provide the IRA custodian with the trust document by the deadline for doing so.
  2. and 3. If income is passed through to Kathy in the year it is received, the estate would take a deduction for Distributable Net Income and Kathy would have to pay the taxes at Kathy’s tax rate.  This means that Kathy will likely have to make estimated tax payments unless Kathy has sufficient tax withholding from Kathy’s other sources of income.  Whether tax withholding on distributions to the trust should be declined depends on whether all of each RMD will be distributed from the trust to Kathy in the year the RMD is received or if some or all of the RMD is retained in the trust to be taxed at (higher) trust tax rates.  Credit for taxes withheld from the IRA distribution cannot be passed through to Kathy.  If excess taxes are withheld, the tax refund would be paid to the trust.

Submitted by Peter Newman on Wed, 2024-03-20 13:31

DMx,

Follow up question please….Is it best not to withhold taxes on RMDs if the goal is to pass through all income (whether conduit or accumulation trust) to the beneficiaries to benefit from their prefereential tax rate?

Thanks,

Peter

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