Help please. Inherited IRA from parent is in the trust. Multiple beneficiaries

[island]

Hi all, This for my spouse who does not have a Boglehead account and prefers to read along than create another password.
Thank you in advance for your assistance.

Spouse's second parent passed away early 2022. Had revokable trust. Beneficiaries are parent's children, all adults between ~ 55-74 y/o. Each asset to be distributed equally between them.
Only things left to take care of are the traditional IRA which turns out is "in the trust", and 2022 taxes.

No beneficiary spend thrifts, special needs, creditor issues, or anything exotic. No state estate tax or inheritance tax issues. No disagreements over any asset shares, the trustee is one of the siblings, very honest, but the first to admit knows the least about such things.

The account is held at EJ and is invested in at least 8 expensive Class A managed American Funds mutual funds and bond funds. None of the beneficiaries want to stay with EJ or keep those funds. The financial planner is heartbroken he's losing the accounts and has tried his best to convince all the beneficiaries to stay with him. That's not happening, most live in other states, have their own arrangements, plus this advisor has made errors which fortunately were correctable, at least so far, but there is little trust.

All beneficiaries share the same goals:
To transfer their share of the IRA to their own inherited IRA without creating a taxable event. Preferable sell all shares within the parent's IRA, receive distribution in cash rather than shares "In kind"( if that's the term) to be deposited in each of their inherited IRA account created at EJ, and then direct transfer to Inherited IRAs of their own at a brokerage of their choice.
If that possible.

Questions:
-We've always read don't put your IRA in a trust, not exactly sure why except that wouldn't allow one to stretch it out over own lifetime? But that's not an option since the SECURE Act, correct?

-What are the issues to look out for since parent's IRA is supposedly in the trust?

-Financial planner's "assistant" said there is no way to sell funds within the parent's IRA in order to deposit distribution in cash to each beneficiaries EJ inherited IRA. Told the financial advisor would have to divide the mutual fund shares for each fund as closely as possible and put those shares in each beneficiaries' inherited IRA. Then each beneficiary would have to sell the mutual funds while their inherited IRA is still at EJ, or once moved to brokerage of choice, BUT cautioned the new brokerage might not accept certain mutual funds!
WTH, this sounds overly complicated. Is it true he can't sell the funds within parents' IRA and deposit equal shares of cash into the beneficiaries' Inherited IRAs? Little trust in what he says.

-Assistant said IRA would be titled "Deceased parent's name IRA care of beneficiary's name" Says that's their standard form, but doesn't it have to have "inherited" in the tile somewhere? What is the correct wording?

- Another wrinkle. Parent didn't take RMD for 2022 before passed.
-How is that taken now?
-Should trustee take it from IRA before funds distributed to beneficiaries? Or do beneficiaries each have to take a share of it after funds distributed? -If both are an option, which is the easiest way to handle, least complicated for filing taxes?
-Who pays the tax, the estate or the beneficiaries?

-Anything else you can think of that we need to beware of or ask about?

BTW the trustee doesn't know the answers, so trying to ask some questions beneficiaries can discuss with trustee in case financial planner trips up again. And no legal consul hasn't had a lot to offer, but so far they family has managed to navigate. Long story w TMI.

Thank you all!

Oh and please feel free to explain like I'm an idiot.

[retired@50]

-What are the issues to look out for since parent's IRA is supposedly in the trust?

This strikes me as odd. I wasn't under the impression that IRAs could be added to a trust.

Was this the case before death, or was the trust the beneficiary of the IRA?

Regards,

[delamer]

What if you directed EJ to sell the current funds, buy a money market fund with the proceeds, and the distribute the money market fund shares equally to each beneficiary’s inherited IRA?

It’s possible that the term “cash” is the hang-up.

But it’s absurd for EJ to claim that it can’t sell share within the IRA. If that’s the real issue.

[Alan S.]

Beneficiaries cannot change any investments until they present a death Cert, and the Trust EIN and trustee's contact info so that the balance can be transferred to an inherited IRA with the trust shown as beneficiary. After that is done, the trustee of the trust can liquidate all the investments in the EJ inherited IRA, which likely include proprietary EJ funds which would not be acceptable for transfer to a new inherited IRA custodian.

All directives to EJ should make it clear that there is to be no actual distributions from the IRA to the trust, since such distributions would be irrevocably taxable. The balance of this inherited IRA can then be transferred to the trustee's preferred IRA custodian.

Trust info must be provided to the new custodian by 10/31 of the year following the year of death or the trust will not be qualified for look through. Since parent evidently passed after their RBD, the IRA would have to be distributed over the decedent's remaining LE if the trust fails qualification for any reason. But if the trust is qualified, the 10 year rule would apply with annual RMDs within the 10 year rule IF the IRS proposed Secure Act Regs are accepted as written. But such annual RMDs are controversial, therefore we do not know for sure whether that requirement will stick or not.

But beneficiary RMDs if required do not start until next year. For this year the remaining RMD of the parent must be distributed to the trust before year end, ideally after the inherited IRA has been transferred to a new custodian.

A key factor here is that the actual provisions of the trust will determine if the trust can be terminated and the inherited IRA can be (or should be) assigned out of the trust to individual inherited IRAs for each trust beneficiary. Such assignment out of the trust would end any creditor protection provided by the trust. Such assignment would not change the RMD requirement from the 10 year rule (without or without annual RMDs as determined by the final Regs), but would provide each beneficiary with full control over their own inherited IRA including investment control and naming of their own successor beneficiary.

Because the procedures here can be confusing, would suggest that the trust inherited IRA should be setup at EJ ASAP, and then directly transferred to a large professional inherited IRA custodian such as Schwab, VG or Fido.

[FreddieFIRE]

But if the trust is qualified, the 10 year rule would apply with annual RMDs within the 10 year rule IF the IRS proposed Secure Act Regs are accepted as written. But such annual RMDs are controversial, therefore we do not know for sure whether that requirement will stick or not.

Alan. I'm probably behind on this. Are there IRS proposed IRS regs that would impose annual RMD requirements on a ten year stretch? Thanks.

[jj45]

When a parent died I became trustee of their trust that had an IRA. The trust was at Schwab and the trust documents said to split the IRA among the heirs and dissolve the trust. Schwab said they couldn’t do that. The lawyer for the estate said some brokerages are difficult and the easiest thing to do was to transfer the trust to another brokerage and split it there. They recommended Fidelity and it was a breeeze. As trustee I had the ability to make transactions and to switch brokerages. I sold all assets in the trust IRA at Schwab and kept the funds in the trust IRA. I then transferred the trust IRA, now containing only cash, to Fidelity. I showed Fidelity the trust documents and had Fidelity create new Inherited IRAs for the heirs with cash. The heirs were then free to do what they wanted.

This was all before the Secure act if that matters.

[bsteiner]

When a parent died I became trustee of their trust that had an IRA. The trust was at Schwab and the trust documents said to split the IRA among the heirs and dissolve the trust. Schwab said they couldn’t do that. The lawyer for the estate said some brokerages are difficult and the easiest thing to do was to transfer the trust to another brokerage and split it there. They recommended Fidelity and it was a breeze. As trustee I had the ability to make transactions and to switch brokerages. I sold all assets in the trust IRA at Schwab and kept the funds in the trust IRA. I then transferred the trust IRA, now containing only cash, to Fidelity. I showed Fidelity the trust documents and had Fidelity create new Inherited IRAs for the heirs with cash. The heirs were then free to do what they wanted.

This was all before the Secure act if that matters.

That was probably the easiest way to deal with it.

But with few exceptions why would anyone leave an IRA to a trust that immediately ends and distributes its assets outright? It would have been simpler to have named the children (or separate trusts for their benefit) as the beneficiaries of the IRA.

The exception is where a plan will only allow one trust as a beneficiary of retirement benefits. In that case, we would create an administrative trust that divides into separate trusts for each child. That happened once with a guild plan.

[jj45]

But with few exceptions why would anyone leave an IRA to a trust that immediately ends and distributes its assets outright?

The lawyer who set up the estate did a terrible job. He was an old family friend and had died several years previous. This was one of many badly designed aspects of the estate and trusts.

[island]

But with few exceptions why would anyone leave an IRA to a trust that immediately ends and distributes its assets outright?

The lawyer who set up the estate did a terrible job. He was an old family friend and had died several years previous. This was one of many badly designed aspects of the estate and trusts.

I think this might be similar situation, except the attorney is still alive. He might be an old friend, family law, and maybe only one in the tiny town. He emailed all beneficiaries that there is a problem, the IRA is in the trust, and working to sort that out. Oddly I think he's the one who did their wills and trust so not sure why seemingly surprised by this "problem".
I don't have any experience reading trusts and wills, but this one looks like boilerplate. Spouse and I read it several times and don't see any specific mention of an IRA. Maybe if not mentioned, it's automatically included as a generic all assets and property type of thing?
At the end of the trust it lists a couple of bank names and account numbers, a EJ account which also held a sizable taxable account, but only one account number for that and again no mention of IRA. Nothing specific in the wills.
So could it be that the IRA lists trust as beneficiary only at Edward Jones? It's all so confusing.

Thanks to all who have replied so far, I'm still trying to understand some of those and will be back with questions.

[island]

What if you directed EJ to sell the current funds, buy a money market fund with the proceeds, and the distribute the money market fund shares equally to each beneficiary’s inherited IRA?

It’s possible that the term “cash” is the hang-up.

But it’s absurd for EJ to claim that it can’t sell share within the IRA. If that’s the real issue.

Thanks for your reply.
We also thought absurd, and spouse and I rephrased the question several different ways, basically asking if EJ could sell the funds WITHIN the IRA, and put the $ in a money market fund WITHIN the IRA so those funds could be divided and put in the individual beneficiaries inherited IRAs when the time came.
And same answer, that's how it's done, no other way, and this.. can't sell the funds because parent is dead. Huh? That was also the case when the taxable account was liquidated and divided so maybe it's a restriction because the IRA is in a trust? Idk.

While searching for info last night found an old blurb that indicated some state laws may require an in-kind transfer to the inherited IRA beneficiaries and others might specify liquidating funds first. Or the trust might specify, but this one doesn't. We don't have any idea where to find if parent's state restricts transfer to in-kind.

And of course we aren't trying to direct EJ to do anything, we know it's the responsibility of the trustee, we're just trying to get info that makes sense and make sure it's not screwed up any further. There are others who have signed docs without even trying to read them or ask questions. We can't relate to that.

[cas]

He emailed all beneficiaries that there is a problem, the IRA is in the trust, and working to sort that out.

The question that has come to my mind with this "the IRA is in the trust" language is: How long has it been there?

The original contributor to the IRA can't title an IRA in the name of trust while they are still alive. So the IRA became titled in the name of the trust after someone's death.

But did this IRA end up titled in the name of the trust because

1. Parent #1 listed the trust as the beneficiary of an IRA held in their name, rather than naming Parent #2 as the beneficiary. And so the IRA may may potentially have been titled in the name of the trust ever since the death of parent #1. (And parent #2 was the beneficiary of trust as a widow/widower.)

-or-

2. Parent #2 held the IRA in their own name and listed the trust as the beneficiary of the trust, rather than the kids. (And so the IRA became titled in the name of the trust relatively recently in 2022.)

I'm pretty sure Alan S's answer above is assuming situation #2.

But the way that various players in this scenario keep being surprised to find that the IRA is titled in the name of the trust makes me wonder if it was situation #1.

[Lee_WSP]

But with few exceptions why would anyone leave an IRA to a trust that immediately ends and distributes its assets outright?

The lawyer who set up the estate did a terrible job. He was an old family friend and had died several years previous. This was one of many badly designed aspects of the estate and trusts.

I think this might be similar situation, except the attorney is still alive. He might be an old friend, family law, and maybe only one in the tiny town. He emailed all beneficiaries that there is a problem, the IRA is in the trust, and working to sort that out. Oddly I think he's the one who did their wills and trust so not sure why seemingly surprised by this "problem".
I don't have any experience reading trusts and wills, but this one looks like boilerplate. Spouse and I read it several times and don't see any specific mention of an IRA. Maybe if not mentioned, it's automatically included as a generic all assets and property type of thing?
At the end of the trust it lists a couple of bank names and account numbers, a EJ account which also held a sizable taxable account, but only one account number for that and again no mention of IRA. Nothing specific in the wills.
So could it be that the IRA lists trust as beneficiary only at Edward Jones? It's all so confusing.

Thanks to all who have replied so far, I'm still trying to understand some of those and will be back with questions.

Edward Jones probably told your in laws to make sure they name beneficiaries. Pretty much all financial advisors and insurance agents do this. I’m sure it’s done out of good will, but when it blows up, it blows up badly. I really wish they’d just stay silent or say “ask your attorney”.

The issue with lawyers is that they don’t follow through and submit the new beneficiary designations and instead leave it to the client to do. Now, this is a cost savings measure, but IMO it should be up to the client to affirmitively decline such services instead of the way it is now.

[CRC_Volunteer]

Per this thread, viewtopic.php?p=6615410#p6615410, I am in the process of setting up a trust as a beneficiary so I can distribute my proceeds according to my wishes. Family structure, as well as Vanguard and Fidelity's rules of succession, necessitated this.

[niagara_guy]

Here is your sentence:

 The financial planner is heartbroken he's losing the accounts and has tried his best to convince all the beneficiaries to stay with him. 

I rewrote it to this:

The SALESMAN wants to keep the commissions from your the money for you and your siblings going forward.

He only gets paid when he convinces people to invest their money with him. This is a business transaction, not a relationship with him. As the Car Guys would say, “does he have a boat payment due?”

I would be getting professional advice, from a lawyer and a tax advisor. If your current lawyer can't handle this it might be time for at least a second legal opinion.

[niagara_guy]

I wonder of another IRA provider (Fidelity, Schwab or Vanguard) would be able to help? I might give them a call and ask.

[FreddieFIRE]

I wonder of another IRA provider (Fidelity, Schwab or Vanguard) would be able to help? I might give them a call and ask.

Fidelity is pretty good at pulling accounts out of other custodians. They helped me when VG was dragging their feet years ago.