Discussion:IRA Named Beneficiary is Trust

I have read the various threads dealing with IRA's that name a trust as the beneficiary, and would like to see if I understand the process and reporting requirements.

My client passed away after her RMD started for her IRA account (she was 73 when she died). She had named her living trust as the beneficiary of her IRA, rather than her two children. It is my understanding that the children can leave the IRA in place, with the trust remaining as the beneficiary. Further, it is my understanding the the RMD going into the future should be based on the oldest of the two children. Let me know if I am on track still!

Further, if they decide to keep this IRA open/continuing, the children would need to continue to file trust tax returns each year to report the RMD, as that is the entity that would be reported as the receipient of the IRA distribution, not themselves. One of the children were not interested in continuing the IRA payment stream (Child A), so took out their share from the IRA in 2006. I note the 1099-R for 2006 does in fact reflect the trust ID#, and reads "The Jane Doh Trust, Beneficiary for IRA of Jane Doh". So, I assume I would report the distribution to the trust return, then show on the K-1 the income distribution from the trust to child "A" that actually received their share in 2006. I would assume I can allocate this distribution to just one of the children (Child A), since she is the one who received the $$$. The other child (Child B) is not interested in receiving any funds from the IRA at this time. But, the RMD will have to taken out each year in the future, and reported first by the trust, then as a distrbution to a beneficiary of the trust, the child (Child B) who decided not to take out any IRA funds for now.

Please let me know if I have it right so far.

Further, is there anyway to avoid having to file a yearly trust return in the above scenario? I would guess not unless the IRA is liquidated by Child B, but then Child B must report the entire distribution as income, which he is not interested in doing at this time.

Thanks for any comments!

Would any thing change if the IRA distributions were directly distributed to Child "A", rather than the trust? I guess I ask this question for the future with Child "B". He will take RMD from the IRA. IF he could receive RMD's directly from IRA rather than distribution going to Trust, could we avoid having to file yearly trust returns? I say IF, as I do not know as of this writing if an option of having a RMD directly distributed to Child "B" is possible. I would think the bank would make the check payable to the trust, as that is the ID the bank is using.

Acronyms and Abbreviations has the answers.

Also, if he left his IRA to a trust, there are very special rules as to whether the surviving spouse can treat it as her own or roll it over.

Be extremely careful here!!!! Refer her to a tax expert. If the trust is indeed the beneficiary of the IRA, the tax expert will need to read the trust to answer your/her questions.

In general, though, if the Trust must take an RMD (it must), then it will get a deduction to the extent that the income is passed out to a beneficiary, who will then pay the tax.

One common mistake the non-professional makes is to forget to look for basis.

Another is to not consider the Estate Tax deduction due to IRD.

If the tax advisor doesn't bring these issues up, then they don't know enough to be your friend's tax advisor. Get another.

(By the way, most "brokers" and bank reps won't know the answers to these questions, so don't trust their advice without checking it against the tax pro's advice first.)

If you want sarcasm, wait for someone to ask why you are posting to a thread about trusts if the IRA wasn't left to a trust. Of course, we assumed you knew what you were doing when you did that.

Now there's a little sarcasm.

OK, I get it, SHE wants to name HER trust as the new beneficiary. I'm surprised your estate planning attorney didn't answer.

Sure, sometimes the original post can be not very clear, contain errors of different sorts, and can even contradict itself. Quite frankly, I believe there are too many prima donnas joining in the responses who are more interested in flaunting their own knowledge than helping out someone who has made the gross mistake of asking a question.

A non-tax professional has no business giving out tax advice, so I stand by my original comment that if he didn't know the basics, he was over his head. I don't give out medical advice and I don't give out car repair advice because I am way over my head in those areas.

Could someone please come up with a nicer way to say "you need professional advice"?

 Maybe someone else can give him better advice than to seek professional help.)

At least it has been a while since foul individual kid's like the one who worked for his Dad a while back has come along.......

As professionals, it becomes very clear and rather quickly that the poster with the question - while the question may be good and this is a site for questions - they are in over their heads and while correctly seeking advise, should be seeking additional, more personal professional advise. Hard to beat around the bush on that one so I believe Kevin - you were PC (politically correct) in what you said. After all, it was only a question and there was no info that he had "already" had an "estate planning attorney" in the loop.

Keep on Trucken.......

Thanks for any insight you can provide.