Trusts as a Beneficiary and Qualified Charitable Distributions: Today’s Slott Report Mailbag

Thursday, May 23, 2024

QUESTION:

I attended the Mid-Year IRA Planning Opportunities 2024 Webinar on May 14th. I missed the reasons for not naming a trust as a beneficiary in an IRA. I know you can name a trust, but what would be the downside?

Thank you,

Victoria

ANSWER:

Victoria,

There are certainly valid reasons to name a trust as your IRA beneficiary. For example, good reasons would include the case of a special needs beneficiary, spendthrift or addiction issues, or if the beneficiary was a minor. But naming a trust is not always the best course of action.

If a trust is the beneficiary, a trust-held inherited IRA would need to be established, and the trust beneficiary could have unnecessary restrictions applied to his or her access to the funds. Trusts introduce what could be totally unnecessary costs and complexity. Additionally, if there are multiple trust beneficiaries, payout rules (like the 10-year rule or a lifetime stretch) could be impacted. 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.

It is our opinion that you must have a good reason to name a trust as beneficiary. If the trust beneficiaries are otherwise healthy, mature adults, and if there is no desire by the IRA owner to control assets after death, then just name the adult beneficiaries directly on the IRA.

QUESTION:

I have a client who has both an inherited IRA and a traditional IRA, both requiring annual required minimum distributions (RMDs). My understanding is that the respective RMDs will need to be taken from each account separately. Does the same rule/logic apply to qualified charitable distributions (QCDs)? If the client elects to make a QCD equal to the amount of the RMDs, will my client need to make a separate QCD from each of the IRAs, or would she be able to aggregate the two RMDs and take them from one IRA (either the traditional or inherited) as a QCD? Thank you.

Brent

ANSWER:

Brent,

You are correct that RMDs from a traditional IRA and inherited IRA cannot be aggregated. Each RMD must be calculated separately and taken from the respective account. Since these RMDs cannot be aggregated and taken from a single account, then separate QCDs must be done to offset both RMDs. Also note that, even though this person has both a traditional and inherited IRA, she is still limited to the total annual QCD amount ($105,000 for 2024).

By Andy Ives, CFP®, AIF®
IRA Analyst
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