IRA funds are paid to the trust….

Submitted by Ed Ricketts on Thu, 2024-06-13 20:00

Referencing a May 23, 2024 article, TRUSTS AS A BENEFICIARY AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG, by Andy Ives, he states, “Also, if IRA funds are paid to the trust and remain in the trust, now we are introducing the high trust tax rates to the equation.”

Can someone give me some real life examples of what would be subject to trust taxes when the trust is the beneficiary to the IRA?

  1. Pre-tax IRA RMDs not timely distributed?
  2. Roth IRA earnings left in for compounding during the 10-year period?
  3. Etc.?

Thank you.

Ed



Submitted by Alan - IRA critic on Thu, 2024-06-13 20:53

Distributions to the trust are generally taxed at the higher trust rates if they are accumulated in the trust. If they are passed through the trust to the trust beneficiaries the distribution will be taxed at the lower individual tax rates for the respective beneficiary.

The terms of the trust will determine what the trustee must do, and what discretionary power the trustee may have in determining whether to accumulate or pass through the income to the beneficiaries. There is a trade off between the higher creditor protections and asset control and tax rates paid on plan distributions from retirement accounts and accumulated earnings.

Submitted by Ed Ricketts on Sun, 2024-06-16 16:03

So, if the Roth IRA earnings are held in the trust to compound, those earning are taxed at the trust tax rate, but if the Roth IRA earnings are distributed to the beneficiaries, those earnings are taxed at the individual tax rates? But distribution of the original Roth principal is not subject to tax?

Thanks Alan!

Submitted by Alan - IRA critic on Mon, 2024-06-17 14:08

Since the vast majority of Roth IRAs are qualified (totally tax free) prior to the owner’s death, qualified by the owner’s death when owner passes prior to 59.5, or qualified by the time the inherited Roth IRA is distributed to the trust, there are no taxes due for either the trust or the beneficiaries.  But if the Roth distribution is held in the trust, taxes will be due on subsequent gains from that balance by the trust is held in the trust or by the beneficiaries if distributed annually to them from the trust. As such inherited Roth IRAs will typically present no tax issues to beneficiaries, including trusts.

Submitted by Ed Ricketts on Mon, 2024-06-17 15:40

OK, then further simplifying what you said, any Roth investment earnings not taken out of the trust (left in for compounding growth), are subject to trust tax. However, if  the Roth IRA never finds its way into the trust, the compounded earnings left in the Roth during the 10-year period are (presently) completely tax free.

Thanks again, Alan!

Submitted by Alan - IRA critic on Mon, 2024-06-17 18:38

Correct.

If the Roth IRA is qualified when distributed to the trust, the distribution will be non taxable. If that distribution is then accumulated in the trust and later distributed from the trust, only the gains generated after the Roth distribution to the trust will be taxable, since those gains did not occur in the Roth IRA.

If a qualified trust beneficiary is subject to the 10 year rule, there are no annual RMDs, and the Roth can be left in place until year 10 before it is distributed to the trust. The gains in those 10 years would be inside the Roth IRA and therefore the entire distribution to the trust will be non taxable.

It’s important that the trust be qualified for look through. If it isn’t, the Roth IRA will be subject to the 5 year rule and will have to be distributed to the trust within 5 years.

Submitted by Daryl Morrow on Tue, 2024-06-18 01:22

If someone names a trust as beneficiary, do the beneficiaries lose the 10 year rule or do the funds have to be distributed immediately?

Thanks…having a hard time finding a clear answer.

Submitted by Alan - IRA critic on Tue, 2024-06-18 03:49

This depends on the nature of the trust and its beneficiaries, and if it is qualified for look through treatment. If not qualified the IRA must be distributed in 5 years (5 year rule) if the IRA owner passed prior to RBD, or over the remaining LE of the decedent if death was on or after the RBD.

If qualified for look through, the 10 year rule will typically apply, but there is an exception for special needs trusts or trusts for the disabled or chronically ill. These trusts can take RMDs over the LE of the disabled beneficiary similar to the old stretch rules. Conduit trusts which must pass through distributions each year can base RMDs on the life expectancy of the conduit beneficiary.

The funds do not have to be distributed from the IRA to the trust other than complying with the RMD rules, but the trustee of the trust can take out more if the trust provisions allow.

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