Income From Roth in Living Trust Taxed at Trust Rate?

Submitted by Ed Ricketts on Mon, 2024-09-02 16:21

Dear Mr. Slott,

In Sept’s IRA Advisor, you said:

“Trust Tactics

“On the subject of trusts, naming a trust as beneficiary of a traditional IRA may not be a good idea. Under current law, the top 37% tax rate kicks in when 2024 trust taxable income exceeds only $15,200!

….

“Again, the solution here is to convert traditional IRA dollars to the Roth side via a conversion. A Roth IRA makes a better trust beneficiary because distributions from an inherited Roth IRA to the trust will be income tax-free, even if the funds are retained in the trust.”

So, if I understand correctly, if my son is beneficiary of my Roth, held by my living trust during the 10-year distribution period, the Roth’s continued investment income retained in the Roth/trust to compound is NOT subject to tax, let alone trust tax.

I hope that is correct!

Thank you,

Ed R.

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Permalink Submitted by Alan - IRA critic on Tue, 2024-09-03 10:17

Distributions to the trust will be tax free once the Roth has been held 5 years in total, adding the time you held it to the time after the trust inherited it. But once distributions are made to the trust, if they are accumulated in the trust instead of being distributed to son currently, the gains generated in the trust will be taxable to the trust.

Permalink Submitted by Hi10Lo5 on Tue, 2024-09-10 14:51

Hi Alan,

So ideally the Roth (now inherited by the trust for sake of the son as beneficiary) should continue to earn tax-free growth for Years 1-10, and at the 10th year it should be distributed in its entirety (100% tax-free) to the trust. At this point, it’s no longer a Roth, is it fair to say the Trust now houses an account that behaves like an “after-tax brokerage account”, whereby the principal is tax-free but earnings each year will be taxed at the higher trust tax rates if they are left to accumulate within the trust. Do I have this right? And for any calendar year the beneficiary son wants to cash out the earnings himself, he is responsible for paying taxes at his personal tax rate (at his personal capital gains rate)?

thanks in advance,

Hi10Lo5