ROTH IRA in Irrerevocable Trust
Alan, my understanding of advice for a married couple (ea. 80 yr. old) with a ROTH IRA wishing to leave the ROTH assets to their adult son (non EBD sole beneficiary) in a Revocable Trust (Irrevocable on the death of the last spouse), is as follows: Assuming the last spouse living has assumed ownership of all ROTH assets and the ROTH IRA has been held for at least 5 years and is qualified for look through, there will be no required distributions from that ROTH for 10 years after the year of owner’s death and all annual earnings of that inherited ROTH if accumulated in the ROTH held in the Trust will also be tax free for 10 years, but all ROTH assets must be distributed to the Trust before the end of that 10th year to be a tax free distribution. Thereafter and beginning in the 11th year the ROTH no longer exists and while no distributions from the Trust Principal are required, any earnings (Div’s, Cap Gains, etc.) of the now Non tax deferred investment will be taxable to the Trust at Trust tax rates if accumulated in the Trust or to the Trust beneficiary if distributed to the Trust beneficiary. Is this correct?
Also,
1. How exactly is that Trust Roth beneficiary typically stated on the Investment Firm’s beneficiary form?
2. The Trust document will clearly state that the ROTH IRA is to remain a ROTH IRA for the allowed 10-year period and that the Trustee shall accumulate all ROTH earnings (Div’s, Cap Gains etc.) during that 10 year tax free period into the ROTH IRA and then shall distribute the entire tax free balance of the ROTH into the Trust in year 10 but preferable after any year end distributions on holdings in year 10. What recourse would the Trust beneficiary have if the Trustee failed to distribute the ROTH to the Trust in the 10th year while that distribution is still a tax-free distribution even though the Trust provisions clearly required that action to occur?
3. Regarding the 10-year tax free distribution period for a non-spouse (non-EBD) beneficiary of a ROTH IRA from an owner death in January 2025, would year #10 be December 31, 2035, therefore giving the beneficiary almost 11 years of tax-free growth or otherwise?
4. In the 11th year after the year of the ROTH owner’s death the former ROTH is no longer a tax deferred investment and no distributions from the investment “principal” are required but any earnings are taxed either to the Trust at Trust tax rates if accumulated in the Trust or to the beneficiary at their tax rate if distributed?
- If any Non-Tax Deferred assets reside in the Irrevocable Trust, their earnings will be distributed annually to the Trust beneficiary and taxed at their tax rate reported on the person’s IRS 1040?
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-11 13:55
Your opening paragraph is correct.
When the trust inherits the Roth IRA from the surviving spouse, the inherited IRA will have to show the name of the trust and the name of the deceased spouse in no particular order. Each custodian has their own rules, perhaps with limited number of characters which will result in abbreviations in many cases. The IRS has no specific requirements other than the identification of both decedent and the trust.
A trust beneficiary always has legal recourse against a trustee that violates the terms of the trust. Damage amounts are subjective, but payment of an excess accumulation penalty would certainly be a specific dollar penalty which would be a cause for recourse.
Re Q 3, there would be almost 11 years of time to generate gains since the inherited Roth need only be distributed by the end of 2035.
Re Q 4 and 5 – that is correct. Accumulated earnings in the trust would be taxed at the higher trust rates. But if timely distributed to trust beneficiaries on a K 1, the beneficiary would pay the tax at their personal rate.