IRA Trust, Transfer and Beneficiary Questions Highlight Mailbag

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag really strikes at the importance of proactive planning. One concerned consumer is worried his mother won’t receive any of her deceased husband’s IRA and others are inquiring on taxes, penalties and transfers.  Retirement planning, IRAs and the nuances that come with them are so important to all families.  We hope you are enjoying the summer and learn something from the questions, answers and situations below.

1.

Presently my spouse and my two children are the beneficiaries of my IRA. I also have a living trust. I would like to make my trust the beneficiary, but my advisors tell me that it will cost more in taxes to do this. My trust would have more control over the inherited money for my children in case of divorce. What do you advise? The IRA is over 2 million with no basis.

Answer:
It depends on what type of trust it is. If the trust is what’s known as an accumulation or a discretionary trust where the trust does not have to pay out all IRA distributions to the trust beneficiaries, then whatever IRA distributions not paid out are accumulated in the trust and taxed to the trust at the higher trust tax rates. However, if the trust is a conduit trust, the trust beneficiaries must receive all IRA distributions from the trust and they are taxed at the beneficiary’s lower personal income tax rates. All required distributions to the trust will be made using the life expectancy of the oldest trust beneficiary. At the death of that beneficiary, required distributions continue to be made to the trust using that life expectancy. The trust would also need to have the appropriate language in it regarding the payment of debts and expenses of the estate and for the Uniform Principal and Income Act (UPAIA) so that it will work with the IRA rules.

2.

Can I transfer money from my IRA to my husband’s Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

Answer:
No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.

3.

Hi Mr. Slott,

My father just passed away July 10. We are still mourning and trying to put our lives back together following a 10-week hospitalization. I was contacted by my parents’ broker, who told me we had problems with my Dad’s IRA. We changed brokerage firms in 2009, the broker came to my parents’ home and we set up their accounts. Both my Mom and Dad have individual IRAs and then a joint account. The call I received was that my sisters and I were beneficiaries on my Dad’s IRA, meaning my mother, (age 81) his surviving spouse, gets nothing. My parents are not wealthy people and that money is needed to secure my mother’s care and future. What do I do? Is the broker accountable at all for setting up a bad account? Do I need a lawyer, if so what type of lawyer?

Any help is greatly appreciated

Respectfully,
Debra Miller

Answer:
You and all your sisters as beneficiaries of the IRA should consider disclaiming the funds. There are special rules for disclaiming an IRA, such as the disclaimer must be filed within nine months of your father’s death, and other rules. Disclaiming an IRA will involve the use of an informed financial advisor and an estate planning attorney. Before you disclaim though, make sure you know who will get the funds. Check the broker’s document to see if it addresses a disclaimer or has a default beneficiary.