Trusts as IRA Beneficiaries

A trust needs to be properly worded, of course, but it can do exactly what you wish. On your death the IRA is then administered by the trust and would make disbursements as you wish. The simplest way is to have it disburse the RMD (required minimum distribution) each year, or you can write in instructions for other amounts, say, for certain specific expenses. For the 8 yr old, I'd do it as well. It's not required, but depending on your state, he'd have unlimited access at 18 or 21, and can blow through the money that instead should provide a lifetime of income.

Thanks, Joe.

I asked the question because I thought a trust could last forever and so there is no way to calculate RMD.

You are saying the trust assumes the age of the beneficery. Is that right?

Frank

Yes. A Trust attorney would know how to properly word it to make sure that happens. Two key points that come to mind: The trust can not be funded while you are alive. If you put the IRA in the trust today, it's deemed a distribution, tax and penalty (if you are under 59-1/2) are due. Second, if you are wanting to set this up for two people, the cleanest way to do it is to have two trusts, and on your death, they each receive half the IRA funds, and take on the distribution based on the child's age. Third, be sure the amount to be disbursed each year is at least the RMD. An RMD not withdrawn from the IRA is subject to 50% penalty. An RMD taken out of the IRA but not distributed to the beneficiary is subject to taxes at trust rates.

Ideally, you want this as simple as possible to administer.

I stress, if the trust attorney says anything about "funding it now" (i.e. changing the IRAs title instead of beneficiary), you need to thank him, and head for the door. That's the litmus test for not understanding this. Let us know how you do with this, or if you have any questions.

Joe

I believe you mean that the trust cannot be funded _from the IRA_ while you are still alive - there's no reason you could not put plain old cash into that trust (if it has crummey provisions, you could even do so without being subject to gift taxes).

The IRA certainly could not be put into the trust. I don't even know of a way to do it even if one tried.

That's a good idea. It's essential that the trusts also have ONLY individuals as beneficiaries. If by some accident, the trust has both an individual and, say, a charity as beneficiaries, the IRA inherited by the trust would have to liquidate (and pay taxes) way faster.

Also a good idea. You do not want to be hit by trust tax rates.

Could you comment on my note about this above - re: funding it with cash right now shouldn't be an issue. Only funding it by somehow trying to shove the IRA into it immediately would be a problem.

Frank, btw, this is a nice article worth reading:

And if you've got a special-needs kid involved, make sure that the attorney you are working with is a specialist on that in particular. You want to make sure that the trust is set up just right in order to mesh best with other benefits the child may be entitled to.

The article you cite is great. Frank asked about using a trust for the IRA distribution, nothing else, I was stressing a point there. Of course a trust can be funded presently, I'd just keep the trusts for the IRAs completely separate, and the the non-IRA trusts away from this dialog to stay on topic.

Thanks for the followup. Perhaps it was just the way I read what you wrote, but it seemed to suggest that the trust should not be funded at all and I wanted to make sure that wasn't what you meant to say. For folks who've already got an ILIT (with only the kids as the beneficiaries for example) set up, if it matches the other parameters necessary for maximum benefit in using the trust as a beneficiary of an IRA, it may make overall administration easier to have fewer trusts involved. But it's essential to make certain that the trust does, in fact, conform to the requirements.

No problem. As you suggest, so long as the details are spelled out, the trustee may have an easier situation with one trust (for each beneficiary). I was using sledgehammer approach to drive home the fact the if the IRA is retitled now, or in any way "put into the trust", then Houston, we have a problem. I've read too many examples of mistakes that resulted in an IRA being deemed distributed.