By Peggy Jane Fisher, CEA, CLTC, CFP
Your new client comes to you with an established Traditional IRA. The new client tells you their trust is the beneficiary of the IRA. Confirm there is a reason they want to control the asset after death. The main reason for having your trust as an IRA beneficiary is to control or protect post-death distributions from the inherited IRA. Once you confirmed they want post-death control use this checklist to make sure the IRA trust works as planned.
1. Is the IRA trust actually named as the trust beneficiary on the IRA beneficiary form?
Ask to see a copy of the beneficiary form.
2. Verify if the IRA custodial agreement will accept a trust as the IRA beneficiary and payout the inherited RMDs to the trust.
To do this you would need to call the custodian and ask them directly. It is not customary to provide this information on the form.
Side Bar – For a company plan, check the company plan agreement – the “Summary Plan Description”.
3. Verify if the IRA trust qualifies as a see-through trust (if that is the intention), then it must meet the four trust requirements mandated by the IRS.
a. The trust is valid under state law or would be but for the fact that there is no corpus.
b. The trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.
c. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.
d. The trustee of the trust has provided the required trust documentation to the plan administrator no later than October 31 of the year following the year of the IRA owner’s death.
In addition to the above requirements, all trust beneficiaries must be individuals or there will be no designated beneficiary on the IRA and the stretch option will be lost.
4. Is the right type of trust is named Conduit or Discretionary trust?
This is important because in a Conduit Trust, the beneficiary pays taxes on the distribution at the individual level. In a Discretionary Trust, any distributions held in the amount over $12,150 in 2014 would be taxed at the trust tax rate, which is currently 39.6%.
5. Look to see…
a. Who is in the Beneficiary Club of a Discretionary Trust? You want to know this because the RMD is calculated on the oldest beneficiary’s age and it includes remainder beneficiaries.
b. No separate account rule for trusts. The separate account rule states that separate accounts must be established by no later than December 31st of the year following the IRA owners death to take advantage of the life expectancy of each non –spouse beneficiary. You lose this option when you choose to designate a trust as a beneficiary.
c. Who’s in and who’s out – This will determine the post-death stretch period.
6. Are all of the trust beneficiaries of a Discretionary Trust individuals (if the stretch is desired)?
This is important because if you have a non-individual as either a beneficiary or a remainder beneficiary and they are not removed during the Shake-Out Period or prior to September 30th of the year after the IRA owner’s death, the IRA will not have a designated beneficiary and the post-death distributions will be paid out according to the rules that apply when there is no designated beneficiary.
7. If the estate may be considered as one of the trust beneficiaries based on wording requiring the estate expenses to be paid from trust.
Example: Attorney fees due as the result of settling the estate would cause the estate to be a trust beneficiary.
Ongoing attorney fees due would be considered an expense of the trust and would not cause the estate to be a trust beneficiary.
8. If the trust will have to comply with Uniform Principal and Income Act, unit trust or power of adjustment provisions.
This concern could be addressed with a “power to adjust”.
9. Is the IRA trust set up as a separate irrevocable trust (for better state creditor protection)?
This was not addressed in current court ruling.
We will learn more about this in the future. Currently this is your best shot at protecting your asset from creditors. It puts a layer of protection between you and the creditor.
10. Is the trustee informed as to the payout of post-death distributions from the IRA to the trust?
Does the trustee know that the year of death distribution is a required distribution and any undisturbed RMDs must be taken by the trust?
In conclusion, the only reason you would name a trust as a beneficiary of an IRA is to have post-death control of the asset. If your client decides they want that control of the asset, then several factors should be taken into consideration. Ten of which are listed above. Most importantly, work with a team of professionals who understand the complex IRA tax laws and their corresponding rules.
Ed Slott, LLC and company, originally published the foundation of this checklist. I have access to it as a member of the Ed Slott Elite Advisor Group™.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with qualified tax or legal advisor.
Peggy Fisher is affiliated with LPL Financial Member FINRA/SIPC Ed Slott Elite Advisor Group is a separate entity from LPL Financial.
If you have any questions, Peggy Fisher, CFP® may be reached at (310) 543-8756.