Trust as Beneficiary OF ROTH and Traditional IRA

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ofj
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Trust as Beneficiary OF ROTH and Traditional IRA

Post by ofj » Thu Jun 07, 2018 6:17 pm

We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir. My spouse and I have a significant seven figure estate. My understanding is that using a Family Trust as the secondary or contingent beneficiary for retirement accounts is preferable to having heirs directly names as the beneficiaries. The advantages of using a trust apparently include keeping retirement account shares out of the recipient’s estate and protecting the accounts against creditors. The Trust would have to be properly drafted in order to qualify for the stretch distribution- our children are 4 years apart.
Is our understanding correct? Any disadvantages to using the Trust? Would the Trust have to specify which retirement account went to each heir or would the trustee have discretion in distributing the retirement accounts?

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FIREchief
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by FIREchief » Thu Jun 07, 2018 6:29 pm

I'm not sure what a "family trust" is. If you establish a qualified retirement plan trust, it will only provide the protections you describe if it is set up as an accumulation trust (i.e. not a conduit trust). That being the case, it might make more sense to name each child as equal beneficiary of the total assets, to be divided into subtrusts for each. If the Roth RMDs are retained (accumulated) within the trust, it won't matter which child benefits as the tax free treatment will be of great benefit in avoiding higher trust income tax rates to each one of them. The trustee of each subtrust (likely the child beneficiary themselves) would have discretion to either distribute the tIRA RMDs to themselves (in order to benefit from lower taxes) or retain them in trust (possibly at higher tax rates, but with the benefit of asset protection).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

bsteiner
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by bsteiner » Thu Jun 07, 2018 9:36 pm

It would be easier to name a trust for child A as the beneficiary of 50% and a trust for child B as the beneficiary of 50%.

Alternatively, you could name a trust for child A as the beneficiary of the traditional and a trust for child B as the beneficiary of the Roth (with appropriate adjustments either in the beneficiary designation or in your Will) to the extent appropriate to provide for them in the desired proportions.
FIREchief wrote:
Thu Jun 07, 2018 6:29 pm
... If you establish a qualified retirement plan trust, it will only provide the protections you describe if it is set up as an accumulation trust (i.e. not a conduit trust). ...
Agreed. Conduit trusts rarely if ever make any sense.

Miriam2
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by Miriam2 » Thu Jun 07, 2018 11:28 pm

ofj wrote: We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir.
Curious why the Roth IRA to the higher income heir and the tIRA to the lower income heir - is it something in the nature of the Roth vs. Traditional IRA that you are trying to accomplish or is it due to what each IRA is invested in?

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by letsgobobby » Fri Jun 08, 2018 12:06 am

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Last edited by letsgobobby on Tue May 07, 2019 10:59 pm, edited 1 time in total.

ivk5
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by ivk5 » Fri Jun 08, 2018 3:16 am

Miriam2 wrote:
Thu Jun 07, 2018 11:28 pm
ofj wrote: We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir.
Curious why the Roth IRA to the higher income heir and the tIRA to the lower income heir - is it something in the nature of the Roth vs. Traditional IRA that you are trying to accomplish or is it due to what each IRA is invested in?
Presumably because it results in lower overall family tax burden, or put differently, maximizes tax-adjusted value of the accounts.

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ofj
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by ofj » Fri Jun 08, 2018 8:40 am

bsteiner wrote:It would be easier to name a trust for child A as the beneficiary of 50% and a trust for child B as the beneficiary of 50%.
Alternatively, you could name a trust for child A as the beneficiary of the traditional and a trust for child B as the beneficiary of the Roth (with appropriate adjustments either in the beneficiary designation or in your Will) to the extent appropriate to provide for them in the desired proportions.
FIREchief wrote: If you establish a qualified retirement plan trust
To make sure I understand, we would need specific trusts for the retirement accounts rather than including the retirement accounts in a "general" trust

ThisTimeItsDifferent
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by ThisTimeItsDifferent » Sun Aug 19, 2018 10:20 pm

bsteiner wrote:
Thu Jun 07, 2018 9:36 pm
It would be easier to name a trust for child A as the beneficiary of 50% and a trust for child B as the beneficiary of 50%.

Alternatively, you could name a trust for child A as the beneficiary of the traditional and a trust for child B as the beneficiary of the Roth (with appropriate adjustments either in the beneficiary designation or in your Will) to the extent appropriate to provide for them in the desired proportions.
FIREchief wrote:
Thu Jun 07, 2018 6:29 pm
... If you establish a qualified retirement plan trust, it will only provide the protections you describe if it is set up as an accumulation trust (i.e. not a conduit trust). ...
Agreed. Conduit trusts rarely if ever make any sense.
Not providing any legal advice....

Based on Natalie Choate's articles at http://www.theworkplace.biz/files/Choat ... iaries.pdf the conduit trust may preserve the stretch RMD capability while the accumulation trust uses the oldest of the ages of the trust beneficiaries AND the successor beneficiaries. If you want to leave an inherited IRA to a child and protect it against spendthrift risks using a trust, and you have no even younger successor beneficiary, then the conduit trust preserves that life expectancy RMD while an accumulation trust does not.

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celia
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by celia » Sun Aug 19, 2018 10:34 pm

ofj wrote:
Thu Jun 07, 2018 6:17 pm
We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir.
Suppose you die when the higher income heir is retired and the lower income heir (or her spouse) is then making lots of money?

The point is that things can backfire when the situation at the time you die is vastly different than what it is today.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

47Percent
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by 47Percent » Sun Aug 19, 2018 11:32 pm

ofj wrote:
Thu Jun 07, 2018 6:17 pm
We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir. My spouse and I have a significant seven figure estate. My understanding is that using a Family Trust as the secondary or contingent beneficiary for retirement accounts is preferable to having heirs directly names as the beneficiaries. The advantages of using a trust apparently include keeping retirement account shares out of the recipient’s estate and protecting the accounts against creditors. The Trust would have to be properly drafted in order to qualify for the stretch distribution- our children are 4 years apart.
Is our understanding correct? Any disadvantages to using the Trust? Would the Trust have to specify which retirement account went to each heir or would the trustee have discretion in distributing the retirement accounts?
From what I have read, your thinking sounds correct. I will try to forward the specific Trust article that addresses the scenario you have at hand.

Not sure what you mean by family trust.. but I think it would be better to set up two separate trusts, one for each beneficiary, and then designate the appropriate trust as directly as the beneficiary for the IRA's. For such an important decision, there is no need to leave it till after your time in the hands of some trustee, nor do you need to delay it since you know what you want. In any case, the IRA beneficiary designation is completely revocable and you can change it any time. You can even have the same trustee for both the trusts.

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by bsteiner » Mon Aug 20, 2018 7:59 am

ofj wrote:
Fri Jun 08, 2018 8:40 am
bsteiner wrote:It would be easier to name a trust for child A as the beneficiary of 50% and a trust for child B as the beneficiary of 50%.
Alternatively, you could name a trust for child A as the beneficiary of the traditional and a trust for child B as the beneficiary of the Roth (with appropriate adjustments either in the beneficiary designation or in your Will) to the extent appropriate to provide for them in the desired proportions.
FIREchief wrote: If you establish a qualified retirement plan trust
To make sure I understand, we would need specific trusts for the retirement accounts rather than including the retirement accounts in a "general" trust
There are some special requirements for trusts that receive retirement benefits. So unless the other assets are very small, each child would have two trusts, one for his/her share of the retirement benefits and one for his/her share of the other assets. (If a child is to receive both traditional and Roth IRA benefits, then that child might have three trusts, one for his/her share of the traditional, one for his/her share of the Roth, and one for his/her share of the other assets.

You don't need separate trust instruments. These trusts can all be in your Will.

This should be a routine matter for a good trusts and estates lawyer, though it would be complicated for someone who isn't.

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by susa » Mon Aug 20, 2018 8:59 am

If a Roth IRA is left directly to an heir, since taxes were already paid on the funds by deceased parents, please post an example of possible tax ramifications ? Does a trust remove any/all of them ?

Assume modest balance, ie. 100k and heir with income below 20k/year.

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by mighty72 » Mon Aug 20, 2018 9:06 am

ofj wrote:
Thu Jun 07, 2018 6:17 pm
We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir. My spouse and I have a significant seven figure estate. My understanding is that using a Family Trust as the secondary or contingent beneficiary for retirement accounts is preferable to having heirs directly names as the beneficiaries. The advantages of using a trust apparently include keeping retirement account shares out of the recipient’s estate and protecting the accounts against creditors. The Trust would have to be properly drafted in order to qualify for the stretch distribution- our children are 4 years apart.
Is our understanding correct? Any disadvantages to using the Trust? Would the Trust have to specify which retirement account went to each heir or would the trustee have discretion in distributing the retirement accounts?
We got our living trust drawn up with an estate lawyer. We are in California and he told us not to put trust as beneficiary for retirement account as it would have tax implications at the time of our demise. My DW and I have each other as primary beneficiary and the kids have equal percentage as contingent beneficiary.

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by Dottie57 » Mon Aug 20, 2018 10:15 am

Both heirs should inherit both TIRA and Roth. Doesn’t matter Who makes more. Situations can change over time. Simplicity is best.

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by bsteiner » Mon Aug 20, 2018 10:58 am

susa wrote:
Mon Aug 20, 2018 8:59 am
If a Roth IRA is left directly to an heir, since taxes were already paid on the funds by deceased parents, please post an example of possible tax ramifications ? Does a trust remove any/all of them ?

Assume modest balance, ie. 100k and heir with income below 20k/year.
With limited exceptions not likely to be relevant, distributions from a Roth IRA are tax-free.
viz wrote:
Mon Aug 20, 2018 9:06 am
ofj wrote:
Thu Jun 07, 2018 6:17 pm
We want to pass on our Roth IRA account to our higher income heir and our Traditional IRA account to our lower income heir. My spouse and I have a significant seven figure estate. My understanding is that using a Family Trust as the secondary or contingent beneficiary for retirement accounts is preferable to having heirs directly names as the beneficiaries. The advantages of using a trust apparently include keeping retirement account shares out of the recipient’s estate and protecting the accounts against creditors. The Trust would have to be properly drafted in order to qualify for the stretch distribution- our children are 4 years apart.
Is our understanding correct? Any disadvantages to using the Trust? Would the Trust have to specify which retirement account went to each heir or would the trustee have discretion in distributing the retirement accounts?
We got our living trust drawn up with an estate lawyer. We are in California and he told us not to put trust as beneficiary for retirement account as it would have tax implications at the time of our demise. My DW and I have each other as primary beneficiary and the kids have equal percentage as contingent beneficiary.
The previous poster had a large estate and wanted to provide for his/her children in trust rather than outright.

If the likelihood that a child will have a taxable estate, get divorced, outlive his/her spouse and remarry, have a creditor problem, or want Medicaid, is small, a client might decide that these protections aren't worth the effort and the likely additional income tax cost of providing for children in trust rather than outright.

Or if the retirement benefits are relatively small, a client might leave the retirement benefits to the children outright even if he/she is leaving his/her other assets to the children in trust rather than outright.

The tax implication is that trusts reach the top income tax bracket at a low level of income, so that leaving traditional retirement benefits in trust will likely result in additional income tax (unless the trustees distribute the amounts they receive from the IRA, though that defeats the benefits of leaving them in trust).
Dottie57 wrote:
Mon Aug 20, 2018 10:15 am
Both heirs should inherit both TIRA and Roth. Doesn’t matter Who makes more. Situations can change over time. Simplicity is best.
It's certainly simpler to leave the traditional and the Roth equally. If you try to earmark assets, you run the risk that one increases in value more than the other, or in this case the relative values change because you have to take distributions from the traditional, and the result ends up not being what you intended. It may be possible to include an equalization provision in the Will, though you would still have to decide how to value a dollar of traditional IRA benefits compared to a dollar of Roth IRA benefits compared to a dollar of nonretirement assets for this purpose.

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FIREchief
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by FIREchief » Mon Aug 20, 2018 12:55 pm

ThisTimeItsDifferent wrote:
Sun Aug 19, 2018 10:20 pm
Not providing any legal advice....

Based on Natalie Choate's articles at http://www.theworkplace.biz/files/Choat ... iaries.pdf the conduit trust may preserve the stretch RMD capability while the accumulation trust uses the oldest of the ages of the trust beneficiaries AND the successor beneficiaries. If you want to leave an inherited IRA to a child and protect it against spendthrift risks using a trust, and you have no even younger successor beneficiary, then the conduit trust preserves that life expectancy RMD while an accumulation trust does not.
It depends. I believe that anyone can come up with a younger successor beneficiary to name in order to preserve the stretch for a primary beneficiary. Some trust boilerplates have an entire article on remote, successor beneficiaries that specifically states that if any are older than a primary beneficiary, that person will be treated as if they are deceased. That said, you are correct that if the main concern is a spendthrift, the conduit trust can be drafted to at least ensure that an independent trustee only distributes the RMDs and perhaps other amounts that are truly needed.

If a person has three children, and the difference in age between the oldest and youngest is four years, then yes the youngest will be "penalized" by the age of the oldest, if the oldest is a successor beneficiary. I was referring to asset protection more so than maximizing stretch payouts. Conduit trusts do not provide good asset protection. Accumulation trusts do. If a person only has one child and that child has no descendants, then a few younger distant cousins might need to be named as successor beneficiaries. I'm sure Bruce can speak to this better than I can.

I'm glad you're looking at that chapter from Natalie's book. I've read that chapter several times and have found that it is generally accepted by the "experts" as the authoritative resource for how to correctly draft a qualified retirement plan trust. :sharebeer I've met lawyers who are pleasantly surprised when I've told them that I've read Natalie's book, and others that have said "who?" Not coincidentally, those other lawyers also demonstrated a lack of knowledge regarding qualified trusts in general. One didn't even understand how RMDs were calculated for a conduit trust. The other didn't even know if the trust she was selling was conduit or accumulation.

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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by bsteiner » Mon Aug 20, 2018 1:21 pm

FIREchief wrote:
Mon Aug 20, 2018 12:55 pm
...
If a person has three children, and the difference in age between the oldest and youngest is four years, then yes the youngest will be "penalized" by the age of the oldest, if the oldest is a successor beneficiary. I was referring to asset protection more so than maximizing stretch payouts. Conduit trusts do not provide good asset protection. Accumulation trusts do. If a person only has one child and that child has no descendants, then a few younger distant cousins might need to be named as successor beneficiaries. I'm sure Bruce can speak to this better than I can.

I'm glad you're looking at that chapter from Natalie's book. I've read that chapter several times and have found that it is generally accepted by the "experts" as the authoritative resource for how to correctly draft a qualified retirement plan trust. I've met lawyers who are pleasantly surprised when I've told them that I've read Natalie's book, and others that have said "who?" Not coincidentally, those other lawyers also demonstrated a lack of knowledge regarding qualified trusts in general. One didn't even understand how RMDs were calculated for a conduit trust. The other didn't even know if the trust she was selling was conduit or accumulation.
...
It may not matter if the trust runs out of beneficiaries. See PLR 201320021: https://www.irs.gov/pub/irs-wd/1320021.pdf. I wrote an article on this in the November 2013 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... of_Ben.pdf.

The balance of the trust has to go somewhere if the child dies without exercising his/her power of appointment. If the child didn't leave any issue, the remainder could go to or in trust for the child's nieces and nephews (or the issue of a deceased niece or nephew), or in your example of an only child, the remainder could go to or in trust for the child's cousins (or the issue of a deceased cousin), perhaps excluding older ones in favor of their issue.

Natalie is coming out with a new edition of her book soon.

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FIREchief
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by FIREchief » Mon Aug 20, 2018 1:50 pm

bsteiner wrote:
Mon Aug 20, 2018 1:21 pm
It may not matter if the trust runs out of beneficiaries. See PLR 201320021: https://www.irs.gov/pub/irs-wd/1320021.pdf. I wrote an article on this in the November 2013 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... of_Ben.pdf.

The balance of the trust has to go somewhere if the child dies without exercising his/her power of appointment. If the child didn't leave any issue, the remainder could go to or in trust for the child's nieces and nephews (or the issue of a deceased niece or nephew), or in your example of an only child, the remainder could go to or in trust for the child's cousins (or the issue of a deceased cousin), perhaps excluding older ones in favor of their issue.
Thanks for posting those Bruce. I skimmed the PLR and read your article (wish I would have read your article first :D ). It would be nice if this were more formal (i.e. law instead of a PLR), but it does provide some food for thought. I'm guessing this means that a grantor of a trust may wish to consider skipping the remote beneficiary designations and allowing the primary beneficiary's will to determine the ultimate recipient(s) of the trust assets upon their death. Am I understanding this correctly?
Natalie is coming out with a new edition of her book soon.
That's good to hear.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

bsteiner
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Re: Trust as Beneficiary OF ROTH and Traditional IRA

Post by bsteiner » Mon Aug 20, 2018 2:07 pm

FIREchief wrote:
Mon Aug 20, 2018 1:50 pm
bsteiner wrote:
Mon Aug 20, 2018 1:21 pm
It may not matter if the trust runs out of beneficiaries. See PLR 201320021: https://www.irs.gov/pub/irs-wd/1320021.pdf. I wrote an article on this in the November 2013 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... of_Ben.pdf.

The balance of the trust has to go somewhere if the child dies without exercising his/her power of appointment. If the child didn't leave any issue, the remainder could go to or in trust for the child's nieces and nephews (or the issue of a deceased niece or nephew), or in your example of an only child, the remainder could go to or in trust for the child's cousins (or the issue of a deceased cousin), perhaps excluding older ones in favor of their issue.
Thanks for posting those Bruce. I skimmed the PLR and read your article (wish I would have read your article first). It would be nice if this were more formal (i.e. law instead of a PLR), but it does provide some food for thought. I'm guessing this means that a grantor of a trust may wish to consider skipping the remote beneficiary designations and allowing the primary beneficiary's will to determine the ultimate recipient(s) of the trust assets upon their death. Am I understanding this correctly?
...
Most clients give the beneficiary a broad power of appointment during lifetime after a specified age and at death. Usually the class of permissible appointees includes anyone except the beneficiary and his/her estate or creditors. Obviously for retirement benefits it has to exclude anyone older than the person whose life expectancy you want to use to measure the required distributions, and anyone other than an individual (in other words, no charities). Sometimes the class is narrower (for example, the beneficiary's issue, or the client's issue).

Even if you give the beneficiary a broad power of appointment, it's still a good idea to provide for default beneficiaries in case the beneficiary doesn't exercise his/her power of appointment.

There's very little law on this other than the statute and the regulations.

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