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Author: FoolishGardner Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121319  
Subject: taxes and trusts Date: 3/26/2014 11:42 PM
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A number of years back my husband and I signed wills and revocable trusts because we had minor children. The children are now young adults. We aren't super wealthy but there could potentially be more worth than we think young inexperienced persons should have at their disposal should something unexpected happen so we have the trust named as the contingent beneficiary on our retirement accounts. Someone said that it is a bad idea to have a trust be the beneficiary of an IRA or other retirement account citing taxation rates of a trust as the reason it was a bad idea.

Can anyone provide information that would help me better understand the pros and cons here?
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Author: medgoddess Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120602 of 121319
Subject: Re: taxes and trusts Date: 3/27/2014 6:23 AM
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Talk to a lawyer in the state that you live in.
Kristi

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120603 of 121319
Subject: Re: taxes and trusts Date: 3/27/2014 9:45 AM
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http://www.bankrate.com/finance/retirement/naming-trust-ira-...

To setup spendthrift trusts you need good professional help. Choosing the trustee is very important. Financial institutions have a reputation for managing trusts for their benefit.

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Author: FoolishGardner Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120606 of 121319
Subject: Re: taxes and trusts Date: 3/27/2014 1:48 PM
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Thank you for sharing that link. Maybe that is where I got the idea it might be a bad route. For the time being, I'm thinking we will leave things as they are. It's not that I don't trust my kids but neither have had any experience with dating and I am more concerned about who might try to take advantage of them. Their uncle would become the trustee and I don't know anyone more ethical than him. The trust is the contingent beneficiary and would only come into play if both my husband and I died at about the same time. A few years from now I can see possibly directly naming them as the contingent beneficiaries.

I was wondering how the taxation worked on trusts. An article I was reading talked about D N I but I didn't quite grasp what constitutes D N I. Would the value of an IRA at the time it went into the trust be considered income to the trust or just the earnings generated after that point.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120607 of 121319
Subject: Re: taxes and trusts Date: 3/27/2014 2:25 PM
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Would the value of an IRA at the time it went into the trust be considered income to the trust or just the earnings generated after that point.

The transfer to the beneficiary is not a taxable event. When money is withdrawn it's taxable to the beneficiary.

Phil

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120616 of 121319
Subject: Re: taxes and trusts Date: 3/28/2014 4:29 PM
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Funny that this thread is ongoing right now, as I have a question that relates to the taxation of IRAs where the trust is designated as the beneficiary.

First, the IRAs involved are both Roth and Traditional. Second, the assets are currently held in annuities, and it my understanding that in all of the annuities the Trust is the beneficiary.

My first concern when asked about this (and other issues not addressed in this post) was: "Will the Roths lose their tax-advantaged status in having the Trust as beneficiary rather than specific family heirs?"

Second, your answer that: The transfer to the beneficiary is not a taxable event. When money is withdrawn it's taxable to the beneficiary.

I assume that is because the OP was referring to a traditional IRA and distributions from them would be taxable to whoever got them.

I guess third would be whether the fact that they are all in annuities makes any difference to the issues related, especially to the Roths.

The owner claims his reason for not making the beneficiaries of the annuities his children and grandchildren is that his understanding that the RMD would be guided by the oldest beneficiary, but I thought this was changed so that each beneficiary can make their own determination.

I deal so rarely with annuities and Trusts as beneficiaries for qualified accounts that I figure you pros could at least point me in the proper direction.

The estate value would be well under $5 million (currently at around $3.6 million) and the State of residence is Florida which, I believe, gives the same credit as the Federal level.

He's consulted with an attorney who set up the Trust and asked some financial planners whose advice was so brief "A Roth is a Roth" that I question whether they were looking more toward the assets that are not part of this post than at the issues I've raised.

Again, I know this is a crazy time of year for you pros and do thank you in advance for any direction you can give me or point me toward.

Poz

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120617 of 121319
Subject: Re: taxes and trusts Date: 3/28/2014 4:42 PM
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The main issue with having a trust as the beneficiary of an IRA is that typically a trust must withdraw the entire IRA balance within 5 years of the owner's death. It does not have the option to spread IRA withdrawals out over a lifetime.

I believe there are ways around this limitation, but I'm far from certain of that. I am certain that I don't know how to accomplish that within a trust and I am also certain that I don't know any potential pitfalls of setting up a trust to spread IRA distributions out over a trust beneficiaries' lifetime (assuming that it IS possible to do so).

--Peter

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120618 of 121319
Subject: Re: taxes and trusts Date: 3/28/2014 4:50 PM
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PosFCF: "The owner claims his reason for not making the beneficiaries of the annuities his children and grandchildren is that his understanding that the RMD would be guided by the oldest beneficiary, but I thought this was changed so that each beneficiary can make their own determination."

I am not a resident pro, nor do I know the answers to your questions, but the statement did not make sense to me because I believe that using a qualfied trust does not lead to a different result than naming the individuals.

Regards, JAFO

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120619 of 121319
Subject: Re: taxes and trusts Date: 3/28/2014 4:57 PM
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ptheland: "The main issue with having a trust as the beneficiary of an IRA is that typically a trust must withdraw the entire IRA balance within 5 years of the owner's death. It does not have the option to spread IRA withdrawals out over a lifetime.

I believe there are ways around this limitation, but I'm far from certain of that. I am certain that I don't know how to accomplish that within a trust and I am also certain that I don't know any potential pitfalls of setting up a trust to spread IRA distributions out over a trust beneficiaries' lifetime (assuming that it IS possible to do so)."


Not vouching for any of the following, but upon cursory review they seemed ok:

http://www.investopedia.com/articles/retirement/04/081804.as...

http://www.morganstanleyfa.com/public/projectfiles/4fc27960-...

http://www.trustok.com/about/news/tread-carefully-in-naming-...

more if you google: IRA beneificiary qualified trust

Regards, JAFO

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120620 of 121319
Subject: Re: taxes and trusts Date: 3/28/2014 5:44 PM
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I found some of the answers in Pub 590 and some more questions as well. The following are the excerpts that I think apply to this individual's planning:

From IRS Pub 590:
Separate accounts. A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any time, either before or after the owner's required beginning date. Generally, these separate accounts or shares are combined for purposes of determining the minimum required distribution. However, these separate accounts or shares will not be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner's death.
The separate account rules cannot be used by beneficiaries of a trust.

Trust as beneficiary. A trust cannot 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.


The bolded parts are the questions....the first bolded section has me wondering how does it relate to the #4 of the next section (these two paragraphs are presented here in the order they appear in 590)?

The second bolded section has me wondering what is meant by "but for the fact that there is no corpus"?

Pub 590 also said about annuities the following (condensed a bit but definitely pointing me to the referenced regulation:
Distributions from annuities: Regulations section 1.401(a)(9)-6

I Googled it, and it looks as if the beneficiaries take distributions from the annuities that are regular and based on the beneficiaries life expectancy, that those distributions would meet the requirements....but I'm no lawyer (nor, obviously, an enrolled agent), so I could be missing much.

My take-away is that if the Trust actually names the beneficiaries then the beneficiaries become "designated beneficiaries" and the withdrawal rules that apply to "designated beneficiaries" applies to them.

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120622 of 121319
Subject: Re: taxes and trusts Date: 3/28/2014 9:40 PM
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The second bolded section has me wondering what is meant by "but for the fact that there is no corpus"?
=====================================
That goes back to very old theories of what a trust actually is.

If I remember my Business Law classes right, the definition of a trust is something like "an arrangement where one party (the "trustee") holds title or possession to property for the benefit of another party" (the "beneficiary".) The other party to the arrangement, of course is the "grantor" (or "settlor")

But the essence of the trust is that the trust has property, or assets. The property placed in the trust is called the "corpus" of the trust. Without it, there is no trust - under this old theory. "Corpus" is sort of an older word, being Latin. The modern terminology is usually trust "principal" instead.

Now many trusts are established under a signed agreement, and then lie dormant until future events occur - usually, somebody dies. This then leads to the question: does the trust exist, without being funded -i.e., without assets?

This is not usually a problem unless state law requires that a trust actually has to be in existence before a probate case begins, or the decedent's estate may be in probate when that was not the intent. And to avoid probate, or to get probate concluded, you don't want a trust created under the actual will. Because then the case can stay open in court for as long as the trust continues, and that can run for generations.

So trust documents often state by stipulation that the trustee has received $10 cash, or something, as the initial transfer of assets.

A trick I used to see, but not so much anymore, is that a lawyer would set up a trust and as soon as he had an ID number, go out and buy a $25 US Savings Bond in the name of the trust. What this did was:
..Put property into the trust.
..The US Treasury was the other party to the transaction, so the IRS couldn't very well question it.
..The savings bond would not produce current income, so no income tax filing would be due for years.

In many states with more modern laws, a trust doesn't have to be funded in advance to be valid. As quoted, the IRS rules specifically don't care whether the trust has corpus, regardless of state law.

In other places, people go through gyrations like those noted above.

Bill

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