IRAs, Trusts and leaving $$ to young children as Beneficiaries

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LookinAround
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IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by LookinAround » Fri Jul 31, 2020 9:26 am

I’m 68, single, retired, live in Illinois and have no debt. I created a revocable trust in 2011 with a local attorney. Beneficiaries are siblings, a couple nieces and 4 young children (today ages range 4 to 8).

I just met with the attorney again July, 2020 to discuss changes including the best way to pass inheritance to the kids. During the meeting I learned he’s not, as he said, “a tax guy”. I found he wasn't yet aware of tax changes in the SECURE act for 2020. Also, back in 2011, he told me I don’t want to make the trust my IRA beneficiary as it’s a taxable event. From what I’ve been reading, that's not necessarily true?

First question is your opinion: I’m currently looking to add a CPA who does estate planning to help with the tax knowledge. Or should I just find a different attorney? Or both?

Second, I’d like to learn options and any advice about leaving $$ to young beneficiaries. I don’t know how much will be there when I’m gone but guessing there share will be low 6 figures per child. I prefer not giving them control at 18.

I've thought of
  • Creating individual trusts for each child but not sure it’s worth the cost for the amount each will get
  • Directing their inherited IRA to their parents and allowing them to use it for the kid’s health and education. But the parents are high earners. So I’m thinking it would be better if IRA distributions were taxed at the child’s rate not their parents.
  • See-through trusts. Not sure if that’s the right vehicle and just what controls it offers on their IRA and other inherited $$. And any incremental cost?
Current summary of estate assets below. I plan to continue IRA to Roth conversions till 72. I will likely live off Taxable Account and not need touch IRAs.

1.5M Taxable (@Schwab, Vanguard along w/CDs and HiYld Savings)
1.2M traditional IRA (@Vanguard)
0.3M Roth IRA (@Vanguard)
0.4M Real Estate
===============
3.4M total

Thanks in advance for any input!
Last edited by LookinAround on Fri Jul 31, 2020 5:50 pm, edited 1 time in total.

RadAudit
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by RadAudit » Fri Jul 31, 2020 10:25 am

LookinAround wrote:
Fri Jul 31, 2020 9:26 am
back in 2011, he told me I don’t want to make the trust my IRA beneficiary as it’s a taxable event. From what I’ve been reading, that's not necessarily true?
LookinAround wrote:
Fri Jul 31, 2020 9:26 am
I’m currently looking to add a CPA who does estate planning to help with the tax knowledge. Or should I just find a different attorney? Or both?
If the first is true, you might need a CPA.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

Chris K Jones
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by Chris K Jones » Fri Jul 31, 2020 10:37 am

You will get better answers from others here, but I think you need a new attorney. Preferably one who deals with this stuff full time. You may need a CPA too, but you definitely need an attorney who knows this stuff. I don't know where you are in Illinois, but I am absolutely certain you can find one or more. Best wishes.

bsteiner
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by bsteiner » Fri Jul 31, 2020 11:09 am

There are many firms in Chicago (and elsewhere) with good trusts and estates departments, some of which may be able to take a matter of this size.

I assume that if the children are only receiving small amounts that they're your grandnieces and grandnephews rather than your children. Is that correct?

Before the SECURE Act, you could have provided for beneficiaries in trust rather than outright and still obtained the stretch. See my article on that in the March 2004 issue of BNA Tax Management's Estates, Gifts & Trusts Journal: https://www.kkwc.com/wp-content/uploads ... 132954.pdf.

Under the SECURE Act, your minor children (but not anyone else's minor children) can still get the life expectancy stretch during minority (which may be up to age 26), after which the 10-year rule applies. That's why we need to be sure whether they're your children or someone else's children.

If the nieces and nephews are young but at least age 27, they might be better off under the SECURE Act if you leave them the traditional IRA in a charitable remainder trust. See my article on this in the April 2020 issue of Trusts & Estates, which discusses when this might work well (and when it might not work well): https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.

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neurosphere
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by neurosphere » Fri Jul 31, 2020 11:41 am

bsteiner wrote:
Fri Jul 31, 2020 11:09 am
If the nieces and nephews are young but at least age 27, they might be better off under the SECURE Act if you leave them the traditional IRA in a charitable remainder trust. See my article on this in the April 2020 issue of Trusts & Estates, which discusses when this might work well (and when it might not work well): https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
It seems like none of the beneficiaries are the OPs children based on the ages and the way the post is worded, but yes something to verify.

Very nicely written article. I knew little to nothing about CRTs and now I feel I know...more. My million mile view lay summary of some pros/cons:

-- It can be hard to decide how best to set up the CRT and requires skilled experts. There is ongoing additional reporting. Thus, assets in a CRT and potential tax savings should be enough to justify the time and expense. Not sure what "enough" is. A million?
-- CRTs are inflexible, and do not provide the beneficiary the option making year to year decisions about how much income to take and pay taxes on, as one can do over 10 years with an inherited IRA.
-- One must be comfortable that most of the money in the CRT might go not go to the beneficiary or their heirs if the beneficiary dies, because upon death the remainder goes to charity "charitable remainder trust". Sounds like CRTs are best suited for a beneficiary who has no need for any extra assets after deaths, e.g. an otherwise wealthy beneficiary, or a special needs beneficiary who only needs the money while alive. On the other hand, a special needs beneficiary may need the flexibility of an IRA rather than the CRT.
-- CRTs are not good for younger (less than 27) beneficiaries, as you make clear.
-- CRTs might turn out to be quite inferior to an inherited IRA, if economic, mortality, and other assumptions turn out to be in accurate. They add additional elements of risk compared to an IRA.
-- Some money must eventually go to charity, which some might view as a feature, and others as a cost/fee.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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LookinAround
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by LookinAround » Fri Jul 31, 2020 12:08 pm

bsteiner wrote:
Fri Jul 31, 2020 11:09 am
I assume that if the children are only receiving small amounts that they're your grandnieces and grandnephews rather than your children. Is that correct?
Yes. I have no children. All of the children are grandnieces and grandnephews. There are four: ages 4 and 4 (twins), 6 and 8 so doubtful I'm alive when they're all 27.

I'll go off and read your CRT article (or does it apply if they all aren't 27 when I pass?).

Does a see-through trust offer any control of the money other than (based on reading i think i can) dictate the amount of RMD each year but, even then, it all must be withdrawn in 10 years which might still be too soon.

Another question: Of the money I leave them in from my taxable account, my current revocable trust says they get their money at age 25 (but plan to raise that to 30). But can that stipulation be made in the trust? Does the money go into a UTMA account till 18 then held by parents or my trustee till 30? Or would that money stay in my Vanguard trust account till then. Obviously uncertain how the distribution works.

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FIREchief
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by FIREchief » Fri Jul 31, 2020 12:37 pm

LookinAround wrote:
Fri Jul 31, 2020 9:26 am
I just met with the attorney again July, 2020 to discuss changes including the best way to pass inheritance to the kids. During the meeting I learned he’s not, as he said, “a tax guy”. I found he wasn't yet aware of tax changes in the SECURE act for 2020.
This is a huge red flag. You need a good estate attorney. In my experience, over half of those in my area claiming to be estate attorney's don't have a good understanding of the nuances of qualified retirement plan trusts.
Also, back in 2011, he told me I don’t want to make the trust my IRA beneficiary as it’s a taxable event. From what I’ve been reading, that's not necessarily true?
Leaving a traditional IRA to a qualified trust, non-qualified trust or estate, or directly to an individual is always a "taxable event." It's just a trade off of when the taxes will be paid. With the SECURE act's passage, the differences for non-qualified beneficiaries are much smaller. If left to a qualified trust, the taxable distributions can be stretched over ten years. If simply left to the estate or a non-qualified trust, they can be stretched over a minimum of five years and, in some cases, even longer than ten years.
First question is your opinion: I’m currently looking to add a CPA who does estate planning to help with the tax knowledge. Or should I just find a different attorney? Or both?
You need the right attorney. I don't have a CPA, but I have no reason to believe that a typical CPA will have any better understanding of this type of estate planning than a lousy attorney.
Current summary of estate assets below. I plan to continue IRA to Roth conversions till 72. I will likely live off Taxable Account and not need touch IRAs.

1.5M Taxable (@Schwab, Vanguard along w/CDs and HiYld Savings)
1.2M traditional IRA (@Vanguard)
0.3M Roth IRA (@Vanguard)
0.4M Real Estate
===============
3.4M total
With those types of assets, it does look like you should be focused on Roth conversions. Why do you think you will do them only until 72? Sure, the RMDs aren't eligible for Roth conversions, but they can be used to pay taxes to withdraw and Roth convert additional tIRA assets. Please see my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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FIREchief
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by FIREchief » Fri Jul 31, 2020 12:42 pm

neurosphere wrote:
Fri Jul 31, 2020 11:41 am
Very nicely written article. I knew little to nothing about CRTs and now I feel I know...more. My million mile view lay summary of some pros/cons:
You may be interested in this thread:

viewtopic.php?f=2&t=319587
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: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by bsteiner » Fri Jul 31, 2020 12:57 pm

neurosphere wrote:
Fri Jul 31, 2020 11:41 am
bsteiner wrote:
Fri Jul 31, 2020 11:09 am
If the nieces and nephews are young but at least age 27, they might be better off under the SECURE Act if you leave them the traditional IRA in a charitable remainder trust. See my article on this in the April 2020 issue of Trusts & Estates, which discusses when this might work well (and when it might not work well): https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
It seems like none of the beneficiaries are the OPs children based on the ages and the way the post is worded, but yes something to verify.

Very nicely written article. I knew little to nothing about CRTs and now I feel I know...more. My million mile view lay summary of some pros/cons:

-- It can be hard to decide how best to set up the CRT and requires skilled experts. There is ongoing additional reporting. Thus, assets in a CRT and potential tax savings should be enough to justify the time and expense. Not sure what "enough" is. A million?
-- CRTs are inflexible, and do not provide the beneficiary the option making year to year decisions about how much income to take and pay taxes on, as one can do over 10 years with an inherited IRA.
-- One must be comfortable that most of the money in the CRT might go not go to the beneficiary or their heirs if the beneficiary dies, because upon death the remainder goes to charity "charitable remainder trust". Sounds like CRTs are best suited for a beneficiary who has no need for any extra assets after deaths, e.g. an otherwise wealthy beneficiary, or a special needs beneficiary who only needs the money while alive. On the other hand, a special needs beneficiary may need the flexibility of an IRA rather than the CRT.
-- CRTs are not good for younger (less than 27) beneficiaries, as you make clear.
-- CRTs might turn out to be quite inferior to an inherited IRA, if economic, mortality, and other assumptions turn out to be in accurate. They add additional elements of risk compared to an IRA.
-- Some money must eventually go to charity, which some might view as a feature, and others as a cost/fee.
It's easy to decide how to set up the CRT. The payout rate would be that rate at which the present value of the charity's remainder interest is 10%. Any law firm with a good trusts and estates group should be able to do it.

The trust files an annual return on Form 5227: https://www.irs.gov/pub/irs-pdf/f5227.pdf. Any of the medium size accounting firms can do it. An accountant not familiar with it may need more time the first year, but after the first year should be able to do it.

At least until now, when CRTs were mainly to be able to sell appreciated assets without current capital gains tax, most of them were for much less than $1 million.

The cost of the remainder going to charity (the present value of the charity's remainder interest, which is 10% of the initial value of the trust) is generally offset or more than offset by the benefit of the deferral.

You can hedge against the risk of the beneficiary dying early and the beneficiary's family losing the remainder by buying life insurance on the beneficiary's life to cover the period until no one is dependent on the beneficiary.

You are correct that CRTs are inflexible. So there would have to be other assets available for the beneficiary for one-off needs.

If the beneficiary is disabled (essentially the same test as for Social Security), you don't need this. A discretionary trust for the benefit of a disabled beneficiary still gets the life expectancy stretch even under the SECURE Act.
LookinAround wrote:
Fri Jul 31, 2020 12:08 pm
... I have no children. All of the children are grandnieces and grandnephews. There are four: ages 4 and 4 (twins), 6 and 8 so doubtful I'm alive when they're all 27.

I'll go off and read your CRT article (or does it apply if they all aren't 27 when I pass?).

Does a see-through trust offer any control of the money other than (based on reading i think i can) dictate the amount of RMD each year but, even then, it all must be withdrawn in 10 years which might still be too soon.

Another question: Of the money I leave them in from my taxable account, my current revocable trust says they get their money at age 25 (but plan to raise that to 30). But can that stipulation be made in the trust? Does the money go into a UTMA account till 18 then held by parents or my trustee till 30? Or would that money stay in my Vanguard trust account till then. Obviously uncertain how the distribution works.
From the ages, I suspected they were grandnieces and grandnephews.

From the ages, I would also suspect that your nieces and nephews are relatively young. So you might want to consider leaving your traditional IRAs to them in CRTs.

Under the SECURE Act, with a few exceptions, IRAs have to be fully distributed by the end of the tenth calendar year after death. There aren't any RMDs other than in the last year the entire balance of the IRA is an RMD. Make sure not to conflate required distributions from the IRA to the beneficiary (trusts in this case) and required distributions from the trust to the beneficiaries of the trust. Unless you provide otherwise (which our clients generally don't), the trustees have discretion to decide each year how much to distribute to the beneficiaries of the trust and how much to retain in the trust.

In that regard, we wouldn't mandate distribution at age 25 or 30. Rather, we would provide that upon reaching the specified age, the beneficiary gains effective control over his/her trust. In other words, the beneficiary may become a trustee, may remove and replace his/her co-trustee (provided the replacement isn't a close relative or subordinate employee), and the beneficiary may appoint (give) trust assets to anyone he/she wants (other than himself/herself or his/her estate or creditors).

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FIREchief
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by FIREchief » Fri Jul 31, 2020 1:20 pm

bsteiner wrote:
Fri Jul 31, 2020 12:57 pm
Unless you provide otherwise (which our clients generally don't), the trustees have discretion to decide each year how much to distribute to the beneficiaries of the trust and how much to retain in the trust.

In other words, the beneficiary may become a trustee, may remove and replace his/her co-trustee (provided the replacement isn't a close relative or subordinate employee), and the beneficiary may appoint (give) trust assets to anyone he/she wants (other than himself/herself or his/her estate or creditors).
Am I correct in assuming that "may appoint (give) trust assets to anyone he/she wants" would be limited to "individuals" in the eyes of the IRS? IOW, if the beneficiary could appoint trust assets to another (non-qualified) trust, charity, etc. it would seem to disqualify the trust as an accumulation trust, which is what is required for retaining tIRA distributions within the trust. Am I understanding that correctly?
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: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by bsteiner » Fri Jul 31, 2020 1:26 pm

FIREchief wrote:
Fri Jul 31, 2020 1:20 pm
bsteiner wrote:
Fri Jul 31, 2020 12:57 pm
Unless you provide otherwise (which our clients generally don't), the trustees have discretion to decide each year how much to distribute to the beneficiaries of the trust and how much to retain in the trust.

In other words, the beneficiary may become a trustee, may remove and replace his/her co-trustee (provided the replacement isn't a close relative or subordinate employee), and the beneficiary may appoint (give) trust assets to anyone he/she wants (other than himself/herself or his/her estate or creditors).
Am I correct in assuming that "may appoint (give) trust assets to anyone he/she wants" would be limited to "individuals" in the eyes of the IRS? IOW, if the beneficiary could appoint trust assets to another (non-qualified) trust, charity, etc. it would seem to disqualify the trust as an accumulation trust, which is what is required for retaining tIRA distributions within the trust. Am I understanding that correctly?
Yes as to trusts receiving IRA benefits. In that case, the class of permissible appointees would have to exclude anyone other than an individual or another trust with the same limitations.

Of course, assuming it doesn't fall into one of the exceptions where you can still get the life expectancy stretch, it no longer makes as much difference whether it qualifies.

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FIREchief
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Re: IRAs, Trusts and leaving $$ to young children as Beneficiaries

Post by FIREchief » Fri Jul 31, 2020 1:37 pm

bsteiner wrote:
Fri Jul 31, 2020 1:26 pm
FIREchief wrote:
Fri Jul 31, 2020 1:20 pm
bsteiner wrote:
Fri Jul 31, 2020 12:57 pm
Unless you provide otherwise (which our clients generally don't), the trustees have discretion to decide each year how much to distribute to the beneficiaries of the trust and how much to retain in the trust.

In other words, the beneficiary may become a trustee, may remove and replace his/her co-trustee (provided the replacement isn't a close relative or subordinate employee), and the beneficiary may appoint (give) trust assets to anyone he/she wants (other than himself/herself or his/her estate or creditors).
Am I correct in assuming that "may appoint (give) trust assets to anyone he/she wants" would be limited to "individuals" in the eyes of the IRS? IOW, if the beneficiary could appoint trust assets to another (non-qualified) trust, charity, etc. it would seem to disqualify the trust as an accumulation trust, which is what is required for retaining tIRA distributions within the trust. Am I understanding that correctly?
Yes as to trusts receiving IRA benefits. In that case, the class of permissible appointees would have to exclude anyone other than an individual or another trust with the same limitations.

Of course, assuming it doesn't fall into one of the exceptions where you can still get the life expectancy stretch, it no longer makes as much difference whether it qualifies.
Thanks for clarifying that Bruce. I agree with the bolded text to the extent the inherited IRA is either a) Roth or b) traditional IRA with modest balance. If the inherited tIRA has a large balance, a non-qualified beneficiary could certainly benefit from a ten year payout (qualified trust) versus a five year payout (non-qualified trust) in many situations.

Link for those interested in more information on the qualified vs. non-qualified trust question:

viewtopic.php?f=2&t=298113
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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