Both my traditional and Roth IRAs have Our Estate as beneficiary.
When the IRA owner dies the Remaining spouse gets the to inherit the IRAs into the Estate Trust.
When are the taxes on the traditional IRA due?
At death? Are the IRAs treated as Inherited IRA and taxes due at withdraw with MRD based on the surviving spouse age? Can the IRA inherited by the spouse pass from the Estate trust to the children as inherited IRA ?
MG
The Estate-as-benefiary is a poor choice. It forces a 5 yr maximum distribution, as the estate does not have a life for a stretch IRA calculation.
A spouse can inherit the IRA, unlimited $$ with no federal estate tax issue. All withdrawals (I'm assuming a Traditional IRA, not Roth) are subject to income tax at the wife's rate.
She has the option to treat the IRA as inherited, which permits (actually forces) RMDs but avoids the 10% penalty if she's under 59-1/2, so a young spouse might like the option to take RMDs or greater each year, vs the other choice, to change title into her name and treat it as her own IRA.
Also, an inherited IRA can have a further beneficiary, but he RMD calculation don't reset, they continue using the math from the initial beneficiary. The spousal titling to her name treats it as a new inheritance for those who are after her.
If what you have is a trust handling the distribution, that's a bit of a different matter. The trust is used to throttle the withdrawals and potentially keep a spendthrift from draining an account soon after inheriting. The RMDs treat the beneficiary as owner, effectively having the trust as a custodian, the estate should not be treated as beneficiary.
Doesn't the estate or estate trust also have to pay _income tax_ on the taxable distributions from the Traditional IRA into the estate or estate trust? Or can it pass on the distribution to the spouse and have the spouse pay the income tax at the spouse's marginal rate rather than at the corporate tax rate on the trust income?
I've seen IRAs liquidated by the estate, and taxes paid at the estate rate. Presumably because the will dictated that all assets of the deceased be liquidated, the taxes paid, and proceeds delivered as cash.
When a trust is acting as a conduit, this doesn't happen. The beneficiary is still the beneficiary, the trust is a pass-thru, and the trustee issues RMDs according to what's required, and potentially higher amounts based on the trust documents. The beneficiary pays income tax at her own rate in this case.
I am still a little confused. The IRA custodian has the estate or estate trust listed as the beneficiary and so expects to distribute all the funds within 5 years. But the estate or estate trust tells the custodian, "Oh no, I am just passing on the money to the surviving spouse who will pay the income taxes due and so only the RMD that the spouse is required to take is what you should disburse to me"? Or does the money still have to come out within
5 years and disbursed willy-nilly to the spouse who may have to pay substantially more in income tax, which is maybe not what the testator intended should happen?Dilip Sarwate
If a trust beneficiary is a spouse or child, the IRA can be distributed to an inherited IRA for that beneficiary. If there are more than one, a separate inherited IRA is set up for each one.
On the custodian paperwork the IRA beneficiary is listed as the Living Trust The living trust establish the spouse as the beneficiary of everything in the trust. The spouse and I are the trustees and beneficiaries.
The trust was set up by a specialized attorney, I am re-reading the trust paper and come up with questions I was not prepared to ask at the time the trust was written.
MG
Joe, thanks for the reply, I figured why my reply came to you instead of going to the group; mistakenly I did not select Reply to Group" Based on your response I think all is set up correctly, to allow a pass-through from IRA to spouse without incurring in the 5 year rule.
Happens all the time, no big deal. Yes, I think your attorney got it right.
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