Discussion:Inherited IRA in an irrevocable trust
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Discussion Forum Index --> Advanced Tax Questions --> Inherited IRA in an irrevocable trust
Discussion Forum Index --> Tax Questions --> Inherited IRA in an irrevocable trust
| 9 September 2008 | |
| Can't seem to "nail" this one down. I have a client whose father passed away and left his three daughters each an IRA, inside his irrevocable trust. Before he began distribution (RMD), he passed away. The two oldest daughters have already taken distribution on their individual IRAs. However, the youngest, age 15 has not. After his death, the accounts were set up as individual IRAs as per the regulations. My question is multi-faceted. I believe that the 15 year old must take distribution within 5 years of her father's death. Correct? However, the trust stipulates that she is not to receive any money until she is 25 years old. So, does the IRA need to distribute the money into the trust and hold it until she is 25? If taxable upon distribution, (it's a traditional IRA) how then is it distributed to her when she reaches 25 as not taxable again? Thanks for your input. | |
| 9 September 2008 | |
| If an irrevocable trust qualifies as the beneficiary under the RMD rules, the life expectancy of the oldest beneficiary is used to make RMD's directly to the trust. | |
| 9 September 2008 | |
| Thanks Riley2. No the trust is not the beneficiary. The account with the Broker is listed as" John Doe, irrevocable trust FBO Jane Doe - Broker's name, Cust Inherited IRA. I am concerned also as to when distribution must begin. | |
| 10 September 2008 | |
| Assuming the father was under the age of 70 1/2, to avoid the 5-year rule, life-expectancy distributions must begin no later than December 31 of the year following death. If the trust is not the beneficiary of the IRA, then the age 25 restriction in the trust agreement is meaningless.
The correct way to handle this would have been to make the trust the beneficiary of the IRA, begin making life-exepectancy distributions directly to the trust, then accumulate the IRA distributions inside the trust until the daughter reached the age of 25, then begin making trust distributions directly to the daughter in accordance with the terms of the trust. | |
| 10 September 2008 | |
| The IRA can be renamed so the income is distributed for many years to come to the children. Why can't the trust be the custodian for the minor daughter? | |
| 11 September 2008 | |
| A custodian must be a corporate entity. Based on the way the account is titled, it does appear that the trust is the beneficiary of the IRA. | |
| 16 September 2008 | |
| Thanks Birgcpa and Riley2. I have been able to find out that the owner of the IRA is now the underaged daughter, according to the broker. This was the result of the separation of the IRA into three separate IRAs, one for each of the daughters. However, as you stated, the fact that the trust dictates that the youngest daughter is not to receive the benefits until she is 25 has nothing to do with the required distribution of the IRA. According to everything I have been able to find out and your inputs, it would appear that distribution must be made within 5 years of the death of the father, and will be taxable. However, the distribution shall be made into the trust and be held there until the youngest daughter reaches 25, at which time she can receive the money, tax free (already paid) plus whatever accrued taxable earnings that may have accumulated in the interim. Undoubtedly, the father really didn't set this up very well. Thanks again for your help and direction. | |
| 16 September 2008 | |
| If the trust is not the beneficiary, distributions should not be made to the trust. Also, life expectancy distributions can be made if such distributions commence no later than December 31 of the year following death. | |
| 17 September 2008 | |
| Riley2. Thanks. But what about the provision that she is not to receive money until she is 25 years old? Does not that require that yes, distribution must be made, and indeed in her behalf, as per the Inherited IRA rules, but the provisions of the trust dictate that she is not to receive the money until she is 25? Incidentally, it is too late to begin distribution by December 31 of the year following death. | |
| 17 September 2008 | |
| A trust instrument can control the disposition of trust property. If the trust is not the beneficiary of the IRA, then the IRA is not trust property, and the trust provisions would not be relevant. | |
| 17 September 2008 | |
| Riley2. Thanks. Okay, I see what you are saying. So then, since the trust is NOT the beneficiary, the trust cannot control the distribution of the IRA, which then falls under the rules for an inherited IRA. Thanks! | |
| 17 September 2008 | |
| The custodian for the minor can set up a trust for her to collect the IRA payments and hold it until she is 25. | |
| 17 September 2008 | |
| Barb CPA, what makes you think that the custodian of a minor can control beyond the age of majority? | |
| 17 September 2008 | |
| But I don't think I understand. Why should the custodian set up "another" trust to collect the IRA distribution, when technically, it's already in a trust to di just that? | |
| 18 September 2008 | |
| Thanks BirgCPA. I think I understand. Since the Trust is NOT the owner OR the beneficiary of the IRA, then it really is of no consequence regarding the distribution of the IRA. Correct? So that if the trustees wanted to comply with the provisions of the "old" trust, they should set up a new trust to do just that. Is that correct? | |
| 19 September 2008 | |
| Hi WOW mountains out of molehills listen to RIley the old trust has nothing to do with nothing. The trustees have nothing to say about the IRA period. The girl is 15 she will pay taxes on her RMD each year and if her GUARDIAN wants to hold the money for her until as Kevin points out she is age of majority then so be it. I dont think a GAURDIAN (certainly not the old trustees unless one is the gaurdian) can set up a trust for a minor with the MINORs money and put restrictions on it. That is a legal question. Talk to a lawyer. I usually pretend to be one but dont know the answer (but will bet my cup of coffee and donut I am right). Once she turns 18 she gets the money any which way she wants period. bye | |
| 19 September 2008 | |
| Hi ps I always like to ask how much money are we wasting our time over? whats her piece?:) bye | |
| 19 September 2008 | |
| Thanks WesR. You're right. And thats what I am going to advise the client. Actually, the oldest daughter, as trustee can really do anything she sees fit according to the trust and the will. The IRA? it was $25,000 2 years ago. | |
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