Naming Trusts as Beneficiaries of IRAs
In one of your courses you recommend NOT naming Trusts as beneficiaries of IRAs. I have an exception case I’d like your opinion on, please.
Case 1, PartA: I have a situation where the husband has an IRA with $11 million and the wife has the $400K home in her revocable trust. They have no other assets and reside in IL which has $4 million estate exemption. The family/bypass trust is useful upon death of the first spouse to move up to $4 million out of the estate. Would it make sense to name the wife primary beneficiary and the trust contingent beneficiary on the husband’s IRA? If the husband dies first, the wife could inherit $7 million in inherited IRA and disclaim $4 million of the IRA to go to the family/bypass trust. If you think this makes sense, do I need to have the attorney update the family/bypass trust document to be a conduit trust(all income paid out) so she can remain an eligible designated beneficiary and get the stretch treatment? Or is an accumulation trust acceptable? The trust beneficiaries are spouse and 3 adult children. The current language is “Trustee may payout income or principal to spouse or children.”
Part B: If the wife dies first, she doesn’t have $4 million of assets, just $4ook home in her revocable trust. I am thinking of accelerating IRA distributions to get some assets into her revocable trust that could to to the family/bypass trust. They are spending $400k/year from the IRA, which is close to their RMDs. Does it make sense to accelerate IRA distributions (35% tax) to have the ability to shift assets to the family Trust upon her death to avoid IL estate tax? Or, is it better to move assets to the wife’s revocable trust now or to an irrevocable trust so assets start growing outside of the estate today? My concern about question #2 are high tax rates for the irrevocable trust and she might not be able to access the money if they spend all of the funds in the husband’s IRA. If the bypass/family trust could potentially inherit the IRA and the trust is written so the trustee “may” but not required to payout income, does that mean the trust doesn’t qualify for the see-through status? And, subsequently the inherited IRA in the family trust would be subject to the 5 year or ghost life rule. The beneficiaries are spouse and 3 adult children (no charities).
Permalink Submitted by Bruce Steiner on Sun, 2024-04-14 22:25
Arleatha: in the small world department, I live in a town adjacent to the one where your office is located.
I think you should try to get a better sense of their objectives, and then perhaps run some numbers, making some reasonable assumptions.
Part A
What is “the trust?”
If H leaves his IRA to W and she takes it, she’ll be able to roll it over and possibly do some Roth conversions. However, they’ll lose the benefit of H’s $4 million state estate tax exemption, thus incurring 16% estate tax on $4 million (plus the income and growth thereon during W’s lifetime) in W’s estate.
If H leaves his IRA to W with a disclaimer trust as backup, and W disclaims $4 million of it, they’ll save this estate tax, but they’ll give up the benefit of the IRA for this money during W’s lifetime. Also, a disclaimer trust is less flexible than a mandatory credit shelter trust.
If H leaves $4 million of his IRA (by formula) to a mandatory credit shelter trust, W can be a trustee, can participate in discretionary distributions to the children and grandchildren, and can have a power of appointment over the trust.
In each case, the trust will get the 10-year rule. A conduit trust wouldn’t make sense since it would throw the IRA distributions into W’s estate, where they would be subject to estate tax.
H could do some Roth conversions and leave Roth IRA benefits to the credit shelter trust.
H might want to consider leaving the state exempt amount to a charitable remainder trust for the children to replicate the stretch. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads/2020/06/Charitable_remainder_trusts_replicate_the_stretch_-_Trusts__Estates_4_2020.pdf .
Part B
As you point out, assuming a 40% combined Federal and state income tax, H could withdraw $6 million of his IRA. That would net $3.6 million, which H could give to W to bring her up to $4 million. However, that would give up the benefit of keeping the $6 million in the IRA.
How likely is it that W will die first? What is each one’s age, health, and family longevity?
Another possiblility is for them to divorce and for H to give W some of his IRA in the divorce. However, most clients wouldn’t want to do that for tax purposes.
Bruce Steiner
Kleinberg, Kaplan, Wolff & Cohen, P.C.
500 Fifth Avenue
New York, NY 10110
t. (212) 880-9818
[email protected]
also admitted in NJ and FL
Permalink Submitted by Arleatha M. Williams on Tue, 2024-04-16 20:43
Thank you so much.