Trust is a Roth IRA Beneficiary from 2014 death before owner’s RBD, no inheritance actions taken
I am attempting to source inherited Roth IRA funds for my mother’s Roth IRA account, and have appropriate POA and trustee designation. However the rules, dates, and tax law changes have left me somewhat bewildered at where I stand. My stepfather died in 2014 with his Roth IRA designating the irrevocable family spendthrift trust as the beneficiary, and he passed well before his RBD at the age of 68. However nothing was ever done as regards inheritance of the Roth IRA which remains in his name, untouched. The trust was originated in 1996 and is very specific about beneficiaries allowable, and names my mother (and myself as successor) as the sole discretionary authority on inheritance after his death. As far as I can tell it meets the qualifications for look-through or see-through, but of course it is pre-Roth IRA and SECURE ACT era so could perhaps be missing some needed verbiage. Complicating the situation is my mother’s descent into dementia in the year 2000 at the age of 80. While she definitely qualifies for EDB “stretch” status, the trust is the direct beneficiary of her deceased husband’s Roth IRA. I’m not sure if there is even case law to make a determination, so I am at least looking for a feel on how successful I might be at 1) avoiding distribution of the Roth IRA and 2) transferring it into her Roth IRA as inherited, claimable as her own. Its relatively clear that I can establish a trust account to hold the funds in the trust name, but is not clear what my responsibilities are as the trustee to distribute the funds, whether by RMD/overdue RMD with penalty ramifications, or by simple Roth non-taxable distribution if they can’t be inherited. Which rules currently govern for this circuitous inheritance and how do I navigate all the twists and turns?
Permalink Submitted by Alan - IRA critic on Wed, 2025-01-29 17:49
If the Roth has not even been retitled to the trust beneficiary, it’s fortunate that it has not escheated to the state.
Unfortunately, under the prior rules that govern this situation, the trust info needed to be submitted to the Roth custodian by 10/31/2015. Apparently this was not done, therefore the trust is not qualified for look through even if the terms would otherwise have qualified it. By not being qualified the 5 year rule applied to the Roth, meaning that it had to be fully distributed to the trust by the end of 2019. However, even if the trust had met qualification, it would have had to be drained over the oldest trust beneficiary’s LE, and if your dates are accurate mother would have been 95 in 2015 and her single LE would have resulted in the Roth being drained in 2018, one year sooner, and as such the trust not being qualified was marginally better.
To avoid further exposure, the Roth should be titled to the trust and distributed. The Roth (not the trust) is qualified and the distribution will be non taxable to the trust. However, after the distribution the trust will have to file a Form 5329 requesting that the IRS waive the penalty for not fully distributing the Roth in 2019. If the form is completed correctly, the IRS will probably grant the waiver request.
The Secure Act did not affect this situation.
Permalink Submitted by Brent Washam on Thu, 2025-01-30 21:40
Thanks for the quick response. The oldest beneficiary was my mother but I used the wrong year to indicate her age, she was 80 in the year 2020 vice 2000. She was born in 1940 so was near 75 when her husband died and is 84 now. You are probably correct that the custodian didn’t have the trust document in 2015, they asked me for it when I recently attempted to transfer the Roth funds as inherited to her, assuming she was the beneficiary. They told me about the trust as 100% beneficiary and wanted me to submit the trust and EIN, and they have just verified my trustee status and asked me to complete a new Roth account application for the trust, to effect the beneficiary transfer. Due to high fees (this is a commodity broker) I plan to have Charles Schwab transfer the account into the trust name for subsequent transfer to her after-tax account as a 100% distribution. It seems the RMD rules are moot with the 5-year 100% trust distribution requirement; thanks for the information to get any RMD non-distribution penalties waived. And thank you for giving me a path forward, the best possible concerning the circumstances.
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-30 22:46
Thanks for the update.
Only issue now appears to be that the Roth will have to be retitled to the trust with the current custodian before you can have it transferred to Schwab. The current custodian can only take directions from you as the trustee after the Roth has been retitled. Once that is complete you can do a direct transfer to Schwab and then take the distribution, or it might be easier to request the distribution from the current custodian and then deposit that distribution into the taxable brokerage at Schwab. They are probably going to levy their fees whether they make a distribution or accept a transfer request through Schwab.
Permalink Submitted by Brent Washam on Sun, 2025-02-02 17:27
It makes sense that account would need to be in the trust name before direct transfer, Schwab told me with the death certificate and trust copy they can make the transfer, which doesn’t seem right. It would need to transfer in the deceased’s name and I have no authority to make that request, my role is the trustee with authority after the trust has the funds. I’ll call Schwab back before filling they’re Inherited IRA Application for a Trust Beneficiary.
Permalink Submitted by Alan - IRA critic on Sun, 2025-02-02 19:34
Yes, the inherited Roth IRA should be retitled in the name and EIN of the trust before it can be transferred to the Schwab inherited IRA with that trust EIN.