I had a meeting with a client last night who is about to inherit a good chunk of cash from his mom. Situation is that Mom died a couple of years ago and the attorney is the trustee. Had $$ in her IRA in which she named her trust as the beneficiary. I've not seen the trust, so I don't know anything about it other than my client is one of the benes of the trust. Client and I were discussing taxation of the distributions. He said the attorney told him when the disbursements were made from mom's IRA that he and his brother would have to treat the disbursements as personal income.
Am I missing something here? Wouldn't the trust have to pay the taxes on the distribution? Why would the distribution from the trust be a taxable even to my client?
It seems so simple to me, but I'm sure I'm missing something. And the client is pretty convinced that the attorney is correct, which makes me doubt my understanding a bit. Anyone dealt with something like this?
I would want the ideas of a CPA before I started doubting what the attorney said especially given the fact that you don't have all the information.
Spiff, it depends on the type of trust. You also have to differentiate between distributions and disbursements. But there are numerous factors involved, and one cannot begin to comment until you see the trust. However, I will say that trusts as beenficiariesa er generally not the most tax-fficient way to pass IRA assets. It is generally done when spendthrift, charitable, or other provisions are necessary. There may be provisions in the trust (or a lack of provisions) that would disallow a trust as beneficiary of the IRA.
Spiff, the details of what you are trying to ask are very murky here. I don't think that it is your fault. It sounds as if you don't have enough details to ask a coherent question.
There are several pitfalls of naming a trust as
a beneficiary. If the plan is for the children to
have complete access to the retirement assets she should have just named them as the beneficiaries! You can always name the trust as the contingent
beneficiary just in case something happens to the children first, or in
case the beneficiaries want to disclaim the assets. The tax code makes it pretty clear that when a trust is named as
the beneficiary, the children cannot take the assets as their own.
There have been numerous Private Letter Rulings (PLRs) where the IRS
has determined that a survivor can take a distribution of retirement
funds that were left to a trust and then roll them over into his or her
own name. Please note that PLRs are only to be used as authority by
the person they are issued for, but a body of PLRs like this will give
us some insight into how the IRS will view a situation where the fact
pattern matches that of the PLR.
Some of the PLRs follow:
200621020, 200603036, 200509034, 200346025, 200025062, 200018055, 200011062, 200424011, 200724032, 200644028, 200603032.
It's not as strong as case law in civil courts but....
The IRA custodian is not required to offer stretch distributions to
beneficiaries. If the account documents limit a beneficiary's options,
then those are the only options the beneficiary is going to be able to
use. Hindsight is 20/20, but... the time to determine the beneficiary options is before the
account owner dies while there is still time to address the problem.
Some contracts are set up so that the Trust can pay the taxes at a "trust rate," before getting passed on, but it doesn't seem like this was the case. The lawyer probably has no reason to lie, so unless he just doesn't know what he is doing, these brothers may have limited options at this point.
Nice cut and paste.
I'm so impressed with your powers of observation.
Do you think I actually memorized those PLR's?
The man had a question and I knew where to find the answer. I try to help people around here when I can (instead of pathetically following people on every thread they post).
Why don't you quit stalking me? I'm not gay.
Update - I had a conversation with the Attorney/trustee and he said that my client's understanding was correct. He said that the money will flow from the IRA to the trust to my client and his brother. Since the trust would hit the maximum tax bracket at $11,500, the trust will pay out the money and then get a tax credit for the disbursement. The brothers will then pay income taxes on the amount that gets distributed to them from the trust. He said they assumed it would be more beneficial for the brothers if they would take the distribution from the trust over a three year time frame instead of a lump sum and it they paid the income taxes instead of the trust.
Is it possible that the attorney set it up so that he would get paid more if he ran the IRA through the trust? Any attorney I've ever spoken with has said that running an IRA through a trust is a bad idea from a tax planning standpoint and that it's an extra step that really isn't necessary. I keep wondering why the attorney would have told this woman, who knew that the money was going to go to her sons at her passing, to run it through the trust if he knew that it would cause a tax issue. Unless he, as the trustee, gets paid for every asset in the trust. He's sat on it for two years now. Two years at collecting trustee fees on $500K. Seems a little sketchy to me.
I think the brothers are pretty screwed right now and stuck with limited options unless someone can give me some other avenue to consider.
Yup, it sounds like they are screwed. Lawyers can really suck sometimes.
This is the type of thing that shady estate attorneys do because you don't figure out that you are screwed until you are dead.
A good estate attorney knows you should try to have as many things outside the estate as possible. Bypass probate, money holdups, and Uncle Sam whenever you can.
BTW, is anyone starting to discuss Roth IRA rollovers as an estate planning vehicle now that the $100k cap will be removed in 2010?