IRA to Trust

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  • #7673
    bill18163
    Participant

    When both my wife and I are deceased 40% of my IRA will go into an irrevocable trust for my niece to be paid out monthly. Will her inheritance in the trust be an IRA or will the inheritance just be money from my former IRA in the trust?

    #7674
    Cape retiree
    Participant

    This sounds like a question that the attorney who made your trust should have been asked to answer. We don’t know the details for your will, or the beneficiary form that your filed with your IRA. Each of you has your own IRAs. That can further complicate it if you are going that your wife has the same wishes listed, since if she inherits your IRA outside of your trust, her beneficiaries may not be the same as yours for the inherited IRA.

    #7677
    Alan S.
    Participant

    Agree, the plan is dependent on the surviving spouse’s actions with respect to both the inherited IRA and their own remaining IRA.

    The portion of the IRA(s) that are left to niece’s trust will be an inherited IRA, and most likely will have to be fully distributed within 10 years of the trust inheriting unless the niece will qualify as an EDB (eligible designated beneficiary) and the trust is qualified for look through.

    #7685
    bill18163
    Participant

    It’s probably my fault because of the way I asked the question. Maybe I caused some confusion by not asking it right. So I’ll try again.
    Let’s just say that my wife has passed on and I am still here. At this point in time my IRA beneficiary document lists an irrevocable trust that has not been funded yet as the recipient of 40% of my IRA. Since I am still alive the money is still mine. It’s not in the trust. Upon my death the trust will become funded with 40% of the funds in my IRA. Now when I have passed on my IRA doesn’t exist any more. The money has been dispersed to all the beneficiaries. This trust that now has 40% of my former IRA in it is for my niece. Since she does not handle her money very well I had the trust written so that she gets an amount of money each month instead of all at once. Now the question I have is as follows. Is the money in that trust still part of my IRA? Does it transfer to the trust as an IRA for my niece? Or is it just money that transferred to the trust and it’s not an IRA? As I write these questions I am almost convinced that the money in the trust has to be an IRA because if the money was taken out of the IRA then taxes would have had to be paid. I need to get this question answered because of the new ten year rule to deplete a inherited IRA. If the trust is still an IRA then I have to go back and have the trust language tweaked to have the money depleted within ten years. I had this trust written before 2020 and I didn’t know the IRS was going to change the ruling.

    #7692
    Alan S.
    Participant

    The 40% of the IRA balance that the trust inherits remains in the IRA until such time as it is distributed to the trust. Typically, the IRA distributions are limited to the RMD, but do not have to be.

    Since 60% of your IRA goes elsewhere, after your death the trustee of the trust should submit your death Cert and other trust info to the IRA custodian and establish a new inherited IRA account with 40% of the balance and titled showing the trust as beneficiary of you and your DOD. It will then be determined if the trust is qualified for look through treatment or not. If qualified, the 10 year rule will apply for distribution of the IRA balance to the trust unless your niece is not more than 10 years younger than you, is still a minor, or is chronically ill or disabled. For those situations if the trust is qualified she is considered an “eligible designated beneficiary” or EDB for short, and the 10 year rule does not apply (except for minors when it kicks in at majority). If the trust is NOT qualified, perhaps because your trustee fails to provide trust documents to the IRA custodian by 10/31 of the year following your death, then the IRA must be distributed within 5 years if you pass prior to your required beginning date, OR if you pass later, then your remaining life expectancy which could be more or less than 10 years.

    Therefore, your IRA still exists as an inherited IRA for the benefit of the trust until it is liquidated as required by the RMD rules or faster if the trust so indicates. This is true even though the trust will be an accumulation trust that does not have to pass RMDs out of the trust to your niece. In this situation, the trust will have to pay the taxes at the higher trust tax rates.

    Note that if your trust specifies that niece is to receive RMDs only that is a problem because the 10 year rule does not have annual RMDs, so niece would get nothing until year 10, then a full lump sum. In that case, the trust should be re done.

    In the most common scenario, your niece will have passed the age of majority when you pass, she will not be an EDB, and the trust will be qualified, meaning the 10 year rule applies. Just because the inherited IRA must be drained within 10 years the trust can continue and disperse funds formerly from the IRA to niece as needed or required.

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