Handling and stretching an IRA through TWO trusts?

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bnes
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Handling and stretching an IRA through TWO trusts?

Post by bnes » Wed Nov 07, 2018 1:52 pm

I'm trying to learn what I can about stretching an IRA through two trusts, for example by reading:
In my case the decedent is, well, dead. She had been taking RMD's all along. She designated some her own living trust as the IRA beneficiary.

The living trust benefits a natural person 50%, plus another special needs trust. That special needs trust designates a second natural person at 100%. The first natural person is married and files jointly in the 25-28% bracket. The second is mid 40's presumed unemployable and delinquent with the IRS, thus I suppose in the 0% bracket.

The IRA custodian won't provide any advice, other than perhaps to seek court order to grant the IRA remainders directly to the two natural persons.

So the question is: which is the lower hassle approach? Court order, or administering the stretch and pass through at the trust level?
If the stretch is administered through the trust, what do the tax forms look like for the trust and for the tax paying natural person?
Last edited by bnes on Thu Nov 08, 2018 11:56 am, edited 1 time in total.

balbrec2
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Re: Handling and stretching an IRA through TWO trusts?

Post by balbrec2 » Wed Nov 07, 2018 3:58 pm

What does the trust attorney suggest? They normally help the trustee through
any settlement process. They shouldn't offer financial advice, only legal.

bnes
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Re: Handling and stretching an IRA through TWO trusts?

Post by bnes » Wed Nov 07, 2018 6:07 pm

The trust and tax attorney is still puzzling through this. The trust was not particularly well drafted.

bsteiner
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Re: Handling and stretching an IRA through TWO trusts?

Post by bsteiner » Wed Nov 07, 2018 11:30 pm

The facts could be clearer, but it looks like the IRA owner ran the IRA through an administrative trust that paid out to or in trust for the ultimate beneficiaries. Other than adding some additional complexity, it probably won't cause any harm, though that will depend on the terms of the trust. There's no limit on how many trusts you may have.

The trustees may distribute the inherited IRA in kind. If the financial institution won't cooperate, the trustees can move the inherited IRA to a different financial institution.

bnes
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Re: Handling and stretching an IRA through TWO trusts?

Post by bnes » Thu Nov 08, 2018 11:06 am

What are the mechanics of this?
If the amounts are passed through, how does the trust take the distribution,
report that on the taxes as passed through, etc? Is there some step by step guide to passing an IRA through a trust?

bnes
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Re: Handling and stretching an IRA through TWO trusts?

Post by bnes » Thu Nov 08, 2018 9:06 pm

This little bit from Fidelity summed the situation up well. Either way it appears that Trust tax rates apply, which is a shame because one of the two look through beneficiaries is indigent, thus 0% bracket.
If the beneficiary is an entity, charity, or non-qualifying trust, and the owner was still living by April 1 of the year following reaching age 70½, the distributions would be based on the remaining Single Life Expectancy of the IRA owner. If the owner was younger than 70½, the assets must be completely distributed by December 31 of the fifth year following the year of the IRA owner's death.

An exception is a "look-through" trust. If certain requirements are met, including that the trust is structured in such a way that the beneficiary is identifiable, the beneficiary may be able to take RMDs based on the date of birth of the oldest beneficiary of the trust. Consult your tax advisor to determine if a trust that names you as the beneficiary may be eligible for this RMD treatment.

Alan S.
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Re: Handling and stretching an IRA through TWO trusts?

Post by Alan S. » Thu Nov 08, 2018 10:02 pm

How are these trusts structured? For example, do the trust provisions allow the trustee to terminate all but the SNT?

If so, the trustee could assign 50% of the IRA to the non disabled beneficiary. As for RMDs, if the trust is qualified for look through, the RMD divisor would be based on the oldest beneficiary of that trust. If not qualified for look through, RMDs would be based on the remaining life expectancy of the decedent. In this case, the IRA could be assigned before any distributions are made to this trust, and with a separate inherited IRA for the non disabled beneficiary, the 1099R would be issued directly to that beneficiary, so nothing would be distributed to that trust.

As for the SNT, that would also need to be qualified for the RMDs to be based on the life expectancy of the SNT beneficiary. In this case, the SNT would remain as an IRA beneficiary with distributions paid to the SNT, not to the SNT beneficiary. A trust tax return 1041 would be filed for the SNT annually. One advantage of the SNT being named as an IRA beneficiary is that any remaining assets in the SNT upon the death of the SNT beneficiary can be inherited by the successor beneficiary rather than being subject to recovery of Medicaid benefits paid to the beneficiary.

Some of this is presumptive since the details of the trust structure are not fully known. Since qualification for look through treatment has a major impact on the applicable distribution period, the trustee must be sure to provide all required trust information to the IRA custodian no later than 10/31 of the year following the year of the IRA owners death. If the deadline is missed, then even if the trust is worded correctly, it will not be considered qualified.

bnes
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Re: Handling and stretching an IRA through TWO trusts?

Post by bnes » Sat Nov 10, 2018 12:50 am

@Alan

The trustee of the family trust can terminate everything except the SNT.
The death was less than a year ago.
The family trust has just one beneficiary (with a caveat).
The SNT has it's own trustee, and has just one beneficiary. The SNT ends on death of the beneficiary, with remainder donated to charity.

Referncing https://www.investopedia.com/terms/s/se ... -trust.asp
The beneficiaries of the trust must be considered eligible and named, with non-living entities or charities not being able to qualify because they do not have a life expectancy. The age of the oldest beneficiary of the trust is used to calculate the RMD.
The caveat is due to a drafting error, .008% of the family tunds benefit the SNT beneficiary directly.

-----------------------
So does each step get reported for tax purposes?

* The original required distribution from the IRA to the family trust
* The transfer to the SNT.
* The SNT's purchase of an asset on behalf of a beneficiary.

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