Control beneficiary spending of 401k or IRA accounts

Consider removing her as the beneficiary and naming your trust, or even a new trust set up just for this, as the beneficiary. This trust can set limits to control the spending.

I believe this would add the account balances to your decedent's estate for the purposes of calculating death taxes, but you may be below the exemption amount. No telling what the exemption amount may be when the time comes, though.

The IRS has rules that allow you to distribute an IRA through a trust into inherited IRAs. I don't know off the top of my head if that would allow you to have a only trustee for your child to have access to those funds, but it is possible. You should talk to your CPA or Enrolled Agent about that.

The only other approach I can think of is for you to move that money into a Roth IRA over time, so that it won't be taxable as it comes out.

Good luck.

The problem is that all the money in the IRA would be subject to income tax when OP dies. That's something she is trying to avoid.

The money would be subject to income tax no matter what - if converted to a Roth, by the trust after death if the trust is the beneficiary, or by the beneficiaries after death as they money is withdrawn.

I read that the OP is concerned with not paying taxes now, to allow continued tax deferred growth.

ISTM the OP's real question was, quote "Is there anything I can do to control her access to that money? "

Apparently the heir would spend it all as fast as possible.

Taxes are a secondary issue.

Yes, which is why I gave my original suggestion. This was a follow up reply to another suggestion, which I think added a bit of confusion on the tax issues.

I'm confused by the answers to this query. If the owner wants to control (limit) how much money is distributed from an IRA that is going to a sole beneficiary (daughter), then the owner needs to create a conduit trust as the IRA beneficiary with the daughter as the trust beneficiary. This makes the daughter an EDB (eligible designated beneficiary) under the Secure Act. As such, RMDS would still use the old stretch IRA rules. The trust could limit annual distributions to the named beneficiary to be no more than the RMD.

There are many investment firms that operate as IRA custodians and also provide "trusteed IRA" services.

What am I missing here?

I think you have nailed it. It was sort of what I was suggesting, but you know the ins and outs of IRA far better than I do.

So Alan, you are saying the distributions to my daughter's spending could be controlled with a trust without the need to pay tax on ALL of the money in the 401k and IRA up front? I was under the (hopefully mistaken) impression that when 401k monies are put into a trust tax has to be paid on all of it at once.

Yes, that can be done. Here's what the IRS says in Publication 590- B:

"A trust can't be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death (or after the death of the owner’s surviving spouse described in Death of surviving spouse prior to date distributions begin, earlier) if all of the following are true.

"1 The trust is a valid trust under state law, or would be but for the fact that there is no corpus.

"2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death.

"3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument.

"4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.

"The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death."

My understanding: A conduit trust can be used to designate the daughter as the "designated beneficiary". Whether the daughter is an "eligible designated beneficiary" that lets the trust avoid the Secure Act's 10 year withdrawal rule depends on whether she meets the "eligible designated beneficiary" requirements. An adult daughter that in the opinion of a parent has a "spending problem" seems unlikely meet the "special needs" requirement. Before this thread, I have never seen anybody assert that a conduit trust automatically makes a beneficiary an "eligible designated beneficiary".

Minor correction. The daughter would be a designated beneficiary subject to the 10 year rule, not an eligible designated beeficary.

Now, if the taxpayer wanted to limit payouts to the daughter to LESS than the RMD, how would that be done? Would the IRA have to be terminated before taxpayer's death and all income taxes paid, with the balance funding a trust for the daughter with tighter distribution rules? Or could the IRA be terminated at taxpayer's death to fund a trust after payment of all income taxes?

In a conduit trust with a designated beneficiary, the 10 year rule merely requires that the retirement account be emptied by the end of the

E.g., it could say that 2.5% of the prior year-end balance is to be distributed every 3 months until the account is empty and if not empty by year 10 that any remaining balance is to distributed in year 10.

This seems to mean that the funds are all available to the beneficiary by year 10.

Depending on Mom's age, I'd suggest slowly taking extra distributions each year to balance the assets between the 10 year money, and funds that can be there, growing for 10 years and slowly distributed after that. The tax code's removal of the lifelong stretch IRA was not opposed life I hoped it would be. Many were using IRAs as estate planning tools.

The OP is trying to balance two somewhat incompatible goals,

Does the OP have a trusted friend (or more than one) in a suitably low tax bracket to whom the funds could be left, and then they'd have complete discretion to transfer the funds to the child? To the extent that the funds are in a Roth the tax bracket is irrelevant. Putting on my family counselor hat rather than financial planner, it would be good to leave written instructions. These could probably not be legally binding, but it would make it much easier for the quasi-trustee to say "Mom told me to give you only this much at this point."

First of all, thank you all for your responses. Now things get even more complex. My daughter has MS and she is on SSDI and lives in housing for the disabled. Someone told me about a "special needs trust". I don't totally understand what it's about but I do know that her dad left her $10k in that kind of trust but she blew through it in less than a year so it still adversely affected her benefits. She would be getting lots more from me (unless I live to be very very very old). This is what I mean by she has no control.