IRA Accumulation Trust as Beneficiary? Pick Your Poison
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- Опубліковано 23 сер 2024
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The new rules of the SECURE Act have significant consequences to those IRA owners who have named a trust as the beneficiary of their IRA or retirement account.
IRA owners want to name a trust as the beneficiary of their IRA for a couple of reasons. First, IRA owners want the post death control that they get from naming a trust as a beneficiary - when a trust is named as a beneficiary, then their child cannot spend all of the IRA funds immediately after the IRA owner dies.
Other IRA owners, in the past, named a see-through conduit trust as the beneficiary of their IRA because they did not want their children/beneficiaries to be able take more than their required minimum distribution after the IRA owner died - the IRA owner wanted the taxable distributions to be "stretched" over the trust beneficiary's lifetime.
If a trust must be used a beneficiary of an IRA, the IRA owner will have to decide between the favorable income tax treatment of a conduit trust, where all distributions are taxed at more favorable individual income tax rates, but the trust is empty 10 years after the IRA owner dies. Or the IRA owner will choose the accumulation trust, giving the IRA owner more post death control, but realizing that distributions accumulated in the trust will likely be taxed at 37%.
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Paul Rabalais
Estate Planning Attorney
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I'm an estate planning attorney and have wrestled with these issues. I have to say that yours was an extremely helpful explanation. It was nice to hear you say that it took some time to get a handle on this as I have found it to be hard to get my head around. Very much appreciate your exposition of this complicated planning area.
Great video. I noticed this is 3 years old so one update. If the original IRA owner was already taking RMDs, a beneficiary subject to the 10 year rule does have RMDs in years 1 through 9. The IRS have forgiven penalties through 2024, but did not specify whether the RMD is still required, thus I would think the trustee could use their judgement. At a minimum they should be able to distribute the RMD if beneficial.
Wonderful explanation with a perfect final segment to put things together - 24% tax with 10 year distribution or 37% tax with a longer distribution. Your videos are the best in UA-cam! Thank you!!!
So, are the proceeds from the IRA, when moved to the conduit or accumulation trust upon the death of the IRA owner, not taxed at the time of the move/transfer to the trust?
Is there a way to draft a trust as an accumulation trust if the parents die while kids are minors and then switch to a conduit at majority?
I wish my attorney would have explained this to me before paying so much for the trust. I think we propbably got the wrong type of trust. I do not want to have to pay the 37% taxes.
I have special need child that I'm not sure will qualify for secure act exemption and we also need to control funds to support his lifetime. Looking at 3rd party SNT (accumulation). I have heavy % of roth in 401k. Any suggestions as to who i should consult with to double check details of what our attorney is suggesting for us? Is it bad form to ask for a 2nd set of eys review of what our our attorney is drafting for us? Just wanting to measure twice, cut once.
Don’t feel bad I’ve been through two trust spent thousands. But now after watching Paul’s videos. I feel confident enough to interview the right estate planning attorney so I don’t overpay for something I don’t need.
I'm curious now.. my brother and I just moved my mom to an ALF and we are currently selling her house that is owned by her living trust and it is the only asset she has and should net about 330k at sale. My brother and I are co-trustees and have co-POA as well. She has a long term care plan that is paying for her ALF care and which will cover about 10 years. We are wanting to grow her estate to not only increase our inheritance but ensure there is enough there to self pay if she lives beyond the 10 years the insurance covers. I understand the proceeds from the sale of her house will be capital gains exempt as her primary residence.. but I dont want the growth of her accounts to be taxed at trust rate while we are trying to grow it.. I plan on putting half in real estate and half in a brokerage account.. I realize the brokerage account will grow tax deferred and if never dipped into would be inherited tax free as falling well below inheritance tax exemption levels.. the half that is in real estate is my concern because I dont want the account accumulating rental income to be taxed if no distribution occurs.. I'm thinking I can put the proceeds from her home into a business entity that her trust owns.. and we should be able to file a schedule c showing nothing but retained earnings to skirt the trust income tax filing.. am I wrong on this? Someone smarter than me please chime in..
We did a conduit trust for my Mom(DOD 2/2022) with my Dad (91yo spouse) as the primary beneficiary and I am the Trustee(age 62). Three children age 55-62 are secondary beneficiaries. I'm working through the details and watching all your videos! Thanks, you are great with the details. I was hoping I could use my Dads SS number on the Vanguard and Fidelity IRA accounts now that the conduit trust is the named owner of my Mom's IRA assets. If I understand correctly my plan would be to do MRDs based on my Dads age until his death. After Dads death, get a trust EIN and distribute the assets over 10 years to the secondary beneficiaries. The beneficiaries may want a quicker distribution so I have the option in the trust of breaking the trust at that point into sub trusts to facilitate tax timing issues. I wonder if I am on the correct path. I still have videos to watch. Thanks again all the help.
How does this work for a Roth IRA in the accumulation trust?
If you have a sizable Roth IRA, I think you can create an irrevocable accumulation trust to receive the distributions at the 10 year point with ten years of tax free accumulation, tax free, move the distributions into a taxable account already set up in the irrevocable trust and then distribute the income from the taxable account to the beneficiary , avoiding the 37% trust tax to be taxed at the beneficiaries' rates. You get controlled full ten tear tax free accumulation, control over distribution to beneficiary, and asset protection throughout the lifetime of the trust..
I am not a lawyer. It sounds plausible. I wonder if having a beneficiary as trustee causes any issues. I don't see why. Texas spendthrift provisions are pretty powerful. I would not not be worried as much about the beneficiary's control issues as much as creditors, etc., that want to get it. Tax free accumulation of an inherited Roth IRA, maybe already over $1 million, would be a tempting target for a litigator over the 10 plus years. Straight movement to an inherited Roth IRA would leave this money very vulnerable.
It might be an interesting subject for video, maybe tied to a parallel discussion about doing Roth Conversions to minimize the beneficiary's tax liability. Giving a beneficiary a 2 million Trad IRA, distributed over 10 years has big downsides. Matched with an accumulated trust as beneficiary of Roth IRA, itself funded by managed Roth conversions during the lifetime of the settlor, would be an interesting tool.
@@michaelblazin4093 Wondering if the profits (income) from the Roth while in the trust would be taxed at the 37% rate. I think they might have to be distributed each year in order to be at taxed at the beneficiaries tax rate.
@@hollycrovo8390 Roths do not have RMDs so the inheritor can leave the money untouched for 10 years. Then the required distribution is tax-free, likely to a taxable account within the trust. Once fully distributed, within the trust, those funds could generate taxable income, capital gains and dividends.
Income not distributed to a beneficiary could get the 37% rate of a trust. A trust cannot differentiate on income type. If it is tax advantageous to the beneficiaries, distributing the tax impacts to people at lower marginal rates, based on the type and the beneficiaries' incomes. would save on total taxes paid. As I worked through scenarios for my trust, I quickly realized that the people I leave behind need to think through these situations TOGETHER every year to maximize the benefit to beneficiaries. Maybe families that had a family trust already knew about being smart. Making the trust pay 37% when the beneficiaries might pay 15% or zero is not being smart.
Cumulation trust for posts-death control seems not worth it at the higher tax rate 37% Even though you could stretch it out over the beneficiaries lifetime. I’m thinking maybe most middle class people probably go with the conduit trust or the grantor income trust. Paul I’m binge watching all your videos. Thanks.
You can distribute the income and tax impacts while keeping the principal behind the asset protection moat. Inherited IRAs still earn money tax-free. The distribution schedule, largely under the trustee's control, drives the tax impacts.
If I have $100,000 in an IRA in an SP fund and want to put it in a Trust for my Brother if I die I will have 2 options: Conduit vs Accumulation.
1) The Conduit Trust will grow my Principal in an SP fund over 10 years. Over these same 10 years, my brother will be able to withdraw 10% of the Fund each year and have to pay income tax on the withdrawal. The remaining balance in years 2-10 of withdrawals will be dependent on the growth/decline of the SP fund.
2) The Accumulation Trust will grow my Principal in an SP fund over over the expected lifetime of my Brother, following an initial 37% deduction upon my death. This Fund's value will be dependent on the growth/decline of the SP fund over the remainder of my Brother's life.
For the Accumulated Trust would my Brother ever pay income tax on the withdrawals? Or does the Accumulated Trust 37% tax apply with every deduction my Brother makes over his expected lifetime (e.g. The fund would grow tax free but be heavily taxed each year when he makes a withdrawal)?
If the trust retains each distribution from a traditional IRA into a taxable account in the trust, the trust pays the tax. I could not find any way for the beneficiary to pay the tax (at rates much lower than 37%) while keeping the money behind the asset protection moat. The K-1 only reports cash distributions that then carry tax impacts.
The regulations still allow some flexibility on RMDs to leverage tax situation if beneficiary, If the beneficiary will have unused deductions, e.g., big college check, the trustee can make a bigger distribution that the college deduction offsets. Or maybe the child takes loans at college and then at graduation, the trust distributes a big check from the IRA to pay for the loans. That way, the trust also stays off the FASFA. Works best if parent of child is not a trust beneficiary because that parent would have to report any trust of which he is the beneficiary.