Avoid Trust Tax
I have a $1,000,000 Roth IRA that I want my family trust (FT) to be the beneficiary of when I depart. I want to leave FT instructions for my son’s use of this money to include he can take no more than 5% per year out, and he needs to keep investing the remaining balance until the 10th year, at which time all the balance must come out.
However, I am concerned that earnings of the Roth in the FT might be subject to trust tax during the 10 years. Am I correct? If so, does anyone know a way to control the withdrawals and avoid the trust tax?
Thanks!
Permalink Submitted by Alan - IRA critic on Fri, 2025-06-06 19:02
No. Inherited Roth distributions will be tax free to the trust, but if they are retained in the trust, subsequent gains will be taxed at the higher trust marginal rates.
For example, if each year 50,000 is distributed from the inherited Roth to the trust and accumulated there, the gains on that 50,000 in the trust will be taxable. But if that 50,000 is passed through your son and your son invests that money, the earnings will be taxed at his lower personal rate, but of course he could spend it all, and then no tax but also no money. You could require that the entire 1mm plus all it’s tax free gains remain in the Roth until the end of year 10, but that will not address his emergency needs. You could give the trustee of the trust discretion over these decisions to allow some flexibility.