We recently posted a question to our fiduciary, attorney, tax advisors and others who recieve our informative emails. Below is the question and some helpful responses.
Caveat: This poll is not statistically significant and neither the results nor opinions expressed by participants represent legal advice, tax advice, investment advice or any other type of advice. Instead, dear reader, we encourage you to research, consider and seek appropriate counsel for your particular situation.
Normally attorneys do not recommend designating your trust as the beneficiary of your IRA for a number of good reasons. Occasionally a settlor may choose to designate the trust as the beneficiary on an IRA account to avoid giving it outright to spendthrift heirs or to provide for children from a previous marriage. For whatever reason, if you are handling an estate in which the named beneficiary of an IRA is a trust, it pays to know how to handle this. Since IRA accounts can be a sizeable asset in an estate, handling this in the wrong manner can have a significant impact.
Question
A fiduciary steps into the role of Trustee upon Sally's death. Assume Sally died on April 1, 2012. Her husband died prior and left an IRA that she rolled into her own IRA account (note: not always the best choice). She then completes the beneficiary designation form and names her trust as the death beneficiary. If you are the new Trustee, what do you do?
A - Trustee must accept IRA assets into the Trust for Sally's beneficiaries.
B - Trustee may decide Sally made a mistake and distribute to heirs directly.
C - Other.
If you are
Sally’s trustee in the example above, you must provide a copy of the trust to
the IRA custodian by October 31.
To make sure
the IRA distributions can be stretched out for longer than the maximum of 5
years allowed by the IRS, the trustee
must provide a copy of a valid trust instrument; which is irrevocable; and,
which has identifiable beneficiaries to
the IRA custodian by October 31 of the year immediately following the year
the IRA owner dies.
Poll Results
Most of our respondents chose answer “A” - Accept IRA assets as designated on the beneficary form into the trust. Since people sometimes do choose to use a trust to control the final distribution of assets held in a retirement or IRA type of account, the successor trustee would be required to follow these wishes. BUT, there is more to the answer when you receive an IRA account to be administered in a trust: determining beneficiaries and action dates.
This poll
resulted is some very thoughtful answers such as this one from Dave Sylvester,
an investment advisor - “First determine
if Sally died before or after her required beginning date (April 1 after she
reached 70 ½). Second determine if the trust is considered a look-through or
non-qualified trust. These two will determine the trustee’s options. When the
trust is a look-through trust the trustee could pull the IRA out of the trust
and set up new inherited IRA accounts for each of the name beneficiaries.”
Or, this one
from Robert Telles, a Walnut Creek attorney,
“It is what it is, and those
instructions should be followed. I have a client who just set up an IRA doing
that very thing. The money is to be available for his second wife, but
following her death it will revert to his existing children. I'm not sure there
is a better way to ensure this.”
Tax Advisor Feedback
“It's important for the trustee to pay attention
to key dates (all of the following fall in the year following the year of
death): September 30th – date
to determine “designated beneficiaries”, which is an individual or a trust that
meets certain IRA requirements; October 31st – deadline to provide
IRA custodian with trust documents, and December 31st – deadline for
beneficiary required minimum distributions (RMD) to begin and to create
separate IRA accounts if there are multiple designated beneficiaries.
Even when there is a mix of designated and non-designated beneficiaries in the trust, e.g. a child and a charity, with proper planning and timing it may be possible to maintain the life expectancy option for the designated benefiary. If the dates are missed, the child may be forced to take the distribution at a faster rate than desired." - Tim
Hintzoglou, EA, CFP with Walnut Creek based Tax & Financial Services.
Attorney Feedback
“We commonly have clients name the trust as a
beneficiary of the IRA(s), after the non-employee spouse, and in the case of
younger children (dole-out sub trusts created under the Trust).
We have found that the only disadvantages are (1) the stretch IRA benefit is based upon the actuarial life expectancy of the eldest of the beneficiares; and (2) the trust wil have to remain open pending the full distribution of the IRA assets." - Peter Sproul,
Walnut Creek Attorney, Mullen & Sproul, LLP
Conclusion
The trustee is
responsible for determining the life expectancy of the oldest living
identifiable beneficiary as this will control the length of term on
distribution. In addition, if the trust language mentions at least one unidentifiable beneficiary, for example the term
“child’s issue” or one that does not have a life expectancy, such as a charity,
then the trustee may need to take another step to stretch the IRA distribution
past five years and more closely follow the settlor’s wishes. The successor
trustee might need to seek a court order to “set” the beneficiaries for the IRA
based upon the currently living children and grandchildren.
Tax issues are
always a factor to take into consideration when handling a trust. A fiduciary
must have a basic grasp of a wide array of areas; including tax, legal, and
investment management, along with heath care matters. In all areas, licensed professional
fiduciaries are encouraged to know when to seek qualified professionals for
specific advice. Licensed, professional
fiduciaries make it their business to know reliable professionals. Feel free to contact us to let us know more
about your professional services or how we might serve you.
