By Loren Acuña

Written or edited by Loren Acuña. Please feel free to add to the thoughts presented here by posting a comment or question.

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Monday, October 29, 2012

Boo! Don’t Get Caught Short October 31

When A Trust Is An IRA Beneficiary 

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.
 
Crucial To Know Now

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.

 

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