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Rules on Trusts as Beneficiaries

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2 replies to this topic

#1 Tinman


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Posted 04 April 2007 - 02:29 PM

IRA's not my area of expertise so I'm looking for some guidance!

I believe a trust can be named as beneficiary for an IRA. Our client would like to set up a IRA with the beneficiary as a trust for his 10 year old son (the client is unmarried). He would like to stipulate there be no access to the money until his son is 25. Here are the questions we have:

1) Is this possible?
2) If the client dies, will the IRA then pay a benefit to his son (regardless of his age)? Or will the funds stay in the IRA until the son reaches Age 25? If there is a payout, can it be lump sum or does it have to be calculated and paid out according to the son's life expectancy?
3) What are the trigger that require money to be paid out to his son (generating a taxable event)?
4) Once there is a distribution, how are the taxes calculated? Based on current rates? Any excise tax?

Your help is appreciated!

#2 BPickerCPA


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Posted 04 April 2007 - 10:58 PM

It's possible to do what you want with a trust, but care must be taken. If set up properly, the IRA would pay out over the child's life expectancy. If not set up properly, then the payout will be much, much faster. Unfortunately, not every attorney (actually a minority) know how to set these up properly.
Barry Picker, CPA/PFS, CFP
New York, NY

#3 Guest_named_mjb_*

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Posted 07 April 2007 - 08:28 AM

Making a trust the beneficiary of an IRA is a very tricky process which requires the advice of expert counsel.
If a minor is a beneficiary of a trust that meets the requirements under the MRD rules, the IRA would make MRDs to the trust on an annual basis based on the beneficary's life expectancy. The payments would be held in the trust and distributed by a trustee to the beneficiary or a guardian in accordance with the terms of a trust that complies with state laws governing trusts, e.g. for health, education and support of the minor or until the minor beneficiary reaches a certain age. The trust can terminate and the beneficiary would receive mrd payments directly from the IRA. The funds held in the trust will be subject to income tax at the higher tax rates for a trust (e.g, 35% for income in excess of 10,450) instead of the lower tax rates for individuals. Since the trust gets a deduction from income for taxable amounts paid to the beneficiary many trusts pass through all income to the beneficiary or a guardian to eliminate income taxation to the trust. A trustee can be an individual or corporate trustee but in either case the trustee is entitled to be paid from the trust for performance of duties.