IRA Benficiaries Question

Only from the standoint that if the trust doesn't have sufficient assets to properly utilize the marital deduction in the marital trust, you may not get full benefit from it.

Generally I recommend that people make the trust the beneficiary so that all estate assets are controlled in one place rather than spread out. If tax is due, for example, someone (other than a spouse) receiving a direct distribution from an IRA might cause problems in terms of the remainder person paying the tax on the portion of the estate going to the beneficiary of the IRA.

It is my understanding that an IRA that is distributed through the means of a trust can still be treated as an inherited IRA. So there are no reasons not to make the trust the beneficiary that I can think of.

I have to ask - what is the purpose of this? If you are beneficiaries of the trust, and there are no others, it's redundant to have each other as contingent.

I advised an 80yr old to set up trusts to handle the IRA distributions post-death. Her older daughter would burn through her inheritance in a week otherwise. This way, she will get RMDs and have the income throttled.

If you have each other as primary, and the trust (for kids?) as contingent, that makes sense, not sure of the intent of doing it the other way around.

Joe

Agreed. The mistake to avoid is to believe that an unfunded trust is an issue. In this case if the IRA is retitled while the original owner is living, it breaks the IRA and it's considered distributed funds. The trust becomes effective on death of owner. This may be obvious but I've heard this happening.

No tax advantage, but if there is more than one beneficiary of the trust, the RMD is based the age of the oldest one. If there is more than a few years between the oldest and youngest, that would result in the youngest getting more than he or she would want or need. Generally speaking, if there are sufficient assets to justify it, it may be better to have a different trust for each beneficiary. These trusts don't have to be set up until the original IRA owner passes away.

You can keep each other as the primary. If the surviving spouse doesn't want or need the money then he or she could disclaim the IRA within nine months after the death of the other.

Gary

Since the ROTH IRAs are in our individual names, not titled in the Revocable Living Trust, what does that mean in terms of going thru probate? One of the purposes of the Trust was to bypass probate, and everything else we own is titled in the Trust.

IRA's are not title in the trust - they are already trusts. If you name a beneficiary of the IRA, it will go directly without probate.

So who the beneficiary is is solely an issue of management. If you think everything can run more smoothly to have the IRA's go directly to your kids, then do it that way. But if things would be more coherent and run more smoothly with everything managed by the trust, then make the trust the beneficiary.

I've read the other answers/comments on your OP and I've read your follow up - that one of the reasons for the trust was to avoid probate. There are several things to consider, so in no particular order -

1 - probate - this is nothing to fear and I'd be surprised if you got out of it even with your living trusts. The whole purpose of probate is to make sure your debts are settled before you pass wealth to beneficiaries. If you've missed ANYTHING at all, someone will need to open a probate estate to settle that asset. And even if you don't need to open a probate estate, doing so may still be a good idea.

Death has many disadvantages, one of them is NOT alleviating the requirement to pay off your final bills and debts. This is part of the what probate accomplishes - making sure your assets are properly accounted for and your debts and bills paid. So if you have sufficient assets your successor trustee will still have to pay your final bills. BUT if you have insufficient assets then your successor trustee will be stuck with dealing with your creditors.

When you file for probate it gets listed in the newspaper and all creditors are put on notice that they have a fixed amount of time to file a claim against the estate - in Maryland its SIX months. If they fail to file timely they forever lose the right to collect. NOT opening a probate estate bypasses this notification and effectively removes that limitation on how long a creditor has to file a claim. So if you pass an asset to a beneficiary via the trust without first making sure all the debts are satisfied AND the creditor files a claim 2 years later, that asset could be in jeopardy OR the trustee could be held personally responsible for the debt.

2 - avoiding probate is NOT the same as avoiding estate taxes. You may avoid probate - by use of a living trust or by use of a Pay on Death beneficiary or by any other beneficiary designation BUT doing so does NOT relieve you of estate taxes. So if your Regular $5M IRA has your son as beneficiary, you'll still have to pay estate taxes on it even though he gets it. Do you have enough other assets to cover these taxes? If not, maybe all of it shouldn't go to the named beneficiary to start with. 3 - Some assets pass outside of probate automatically, without the need for a separate trust, living or otherwise. For example, I could list you as a "Pay on Death" beneficiary of my bank account. On my death you deliver a copy of my death certificate to the bank and you get whatever is in my account. No probate necessary. Additionally, if such a POD is on the account the trustee has no say over the account either - by act of law it should pass to the named beneficiary.

IRAs, insurance policies and investment accounts act in a similar manner. The named beneficiary of your IRA is the one who'll get the money on your death. There is no need to list the trust as a beneficiary. At the same time, I'm not really sure you can title the IRAs in your name. Remember the I stands for INDIVIDUAL and a trust isn't an individual. Just like you can't have a JOINT IRA account, I'm not sure you can title an IRA to a trust. You can list the trust as a beneficiary, but that is redundant.

3 - You can name a trust as beneficiary but you need to be very, VERY careful in doing so. In order to use the stretch payout rules every beneficiary named in your trust must be actually named - you can say my son, Bill - you CANNOT say all my grandchildren, since this doesn't identify them. If you don't ID each beneficiary sufficiently then the trust will be deemed to be the beneficiary, not the trust's beneficiaries, and you will NOT be able to use the longer payout lives. Remember, a trust, like a corporation or LLC is a legal fiction - it doesn't really exist, it doesn't breath, it doesn't die, hence it has no life expectancy of its own. If the underlying document doesn't have enough info so that you can identify who gets how much and how they are then you can't use the stretch rules to drag out distributions. 4 - by naming your spouse as primary beneficiary with your trust as contingent beneficiary your wife can later manipulate how much she takes and how much goes into a Credit Shelter Trust - for her use, with the remainder passing on her death and outside of her probate or estate tax issues. This is advanced tax and estate planning and should NOT be attempted unassisted by a professional.

Good luck, Gene E. Utterback, EA, RFC, ABA

There is another purpose of probate - to make certainly your property goes where it is supposed to. A trust can make that happen without court intervention in overwhelmingly most cases.

If there is a problem and heirs dispute handling or distributions from the trust, it may well end up going to court anyway, that's true. But other issues don't necessarily have to end up in court - and certainly not in as expensive a court as probate. If a creditor has a problem it can sue in small claims, for example.

If there are insufficient assets to pay all debts, the creditors would prefer a trust because there would likely be more money left over to pay them if standard probate fees are avoided. Those fees vary by state, of course. But whatever they are, most of the time they are higher than would be necessary if a trust is used.

That will also depend on the laws of your particular state. In California there is an optional procedure for trusts, that gives notice to creditors and a cut-off time for making claims, just as with probates.

Yes, that's certainly true.

True. But a trust is the only way to avoid probate, avoid what I call the marital penalty in the estate tax, and also allow the surviving spouse to have use and control of the deceased spouse's property during her life.

What I call the marital penalty involves the desire of most people to pass what they have to their spouses. With a $1,000,000 estate tax exemption and, for example, spouses with $2,000,000 in assets, one spouse's death vests the other with the whole of those assets. When the second one dies she gets only one $1,000,000 exemption, and pays an unnecessary tax on the other $1,000,000.

Additionally, when property passes outside of a trust or probate, and the estate owes estate taxes, the ones who are left getting property from the estate end up paying the taxes, while the others (if there are sufficient assets in the trust or estate) bear the entire brunt of the taxes. If everything goes into the trust or probate estate, the burden can be shared equally - or as the decedent wishes.

I don't think it's redundant. A trust gives you a lot more flexibility to control the property if, for example, your beneficiary dies before you do and you don't get around to changing the beneficiary designation. And again, it allows better tax management than direct payments to beneficiaries.

That's an excellent point, and one that should be taken into consideration whenever anyone does his estate plan.

How does that work? If she's the beneficiary, how can she pass that to the credit shelter trust? If she becomes the owner of that propert, she can't get it back into the trust to bypass her estate.

snipped a lot

First, for clarity, as my esteemed colleague Stu is an attorney so I will defer to his learned judgment on the legal issues.

Second, to answer his question - if the decedent used a pour over will to establish a credit shelter trust and named his spouse as primary beneficiary and the credit shelter trust as contingent beneficiary, on his death the surviving spouse gets to decide whether SHE gets the money directly or whether it goes into the credit shelter trust. I've seen this used when there are questions about what the estate exemption may be in the future and there are questions about whether there will be sufficient assets to make use of the exemption.

I see now that I may not have been clear in comment about using a trust as contingent beneficiary. I knew what I meant, but as the OP talked about a living trust it is now apparent to me that I was not clear enough in my writing. It would be very easy to think I was talking about using a living trust as contingent beneficiary when I actually meant using a credit shelter trust as contingent beneficiary.

Gene E. Utterback, EA, RFC, ABA

Thanks for the clarification, Gene.

When the deceased spouse's trust is set up as what is technically known as a Q-TIP trust, the trustee of the trust (which may be the surviving spouse) can make an election to tax some or all of it in the deceased spouse's estate, and the balance would be taxed in the surviving spouse's estate when she dies.

The great benefit of this trust is that, if the surviving spouse is the trustee, she can get all the income from the trust, and even withdraw principal if she establishes a need for it. But when she dies the part elected out is not taxed in her estate.

You can get the same tax benefit without a trust by passing the deceased spouse's property directly to the kids instead of to the surviving spouse. But in the real world, most people wouldn't want to do that.

For me the point was whether to make the trust the primary beneficiary. While it's not always the best way to handle things, it seems to me that in the normal case it is better to have the trust as the beneficiary, to manage all estate assets and distribute them from there. It means you can handle tax payments and calculations more effeciently, and avoid differences in distributions to different beneficiaries that may be caused by stock market or other financial fluctuations.