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Revocable Trust as IRA Beneficiary???


Guest kkgant
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Guest kkgant

For estate planning purposes, what are the tax consequences if a person names a revocable trust as the beneficiary of their IRA? I am not familiar enough with all of the estate tax issues & IRA distribution issues that come into play here. Someone asked me this question, and I really need a resource to go to rather than a simple answer. Help!

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When naming a revocable trust as the IRA beneficiary, you need to first determine whether the trust will qualify as a designated beneficiary. A designated beneficiary is one with a life (and thus a life expectancy). There are 4 requirements that a trust must meet to be a designated beneficiary. The trust must be legal under state law, the beneficiaries must be identifiable, it must be irrevocable upon the death of the IRA owner and some paperwork requirements must be met.

If the trust does qualify, the oldest beneficiary's life will be the measuring life for post death distributions. If the trust does not qualify, the decedent's remaining life expectancy (if over 70.5) or the 5 year rule (under 70.5) will determine the period for making the payments.

After death each RMD will be transferred from the IRA to the trust. What happens next depends on the trust agreement. If the trust is supposed to distribute income, some or all of the RMD will be paid (and taxed) to the beneficiary. If the trust agreement doesn't define how much is income when an RMD is received, you look to the state law. Here in California, 10% of each payment is presumed to be income and the balance principal. If the trust can only distribute income, it will pay tax on 90% of the distribution (at compressed rates available to trusts).

There are some good reasons to use a trust as a beneficiary, but they are not income tax reasons. I ususally recommend that a revocable trust be a contingent beneficiary rather than the primary beneficiary.

Mary Kay Foss CPA

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It would be more efficient to first determine what you are trying to accomplish, and then to look for (or ask the lawyer who handles your estate planning to recommend) how best to accomplish your objectives, rather than asking about the merits of a particular technique.

Bruce Steiner, attorney

(212) 986-6000

also admitted in NJ and FL

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Guest nikomendy

IRA is inherited by two benficiaries--(not spouses)

understand that RMD is recomputed, using age of

oldest benficiary and that beneficiares can elect

to continue annual (rmd) distributions--e.g., they

are not forced into a lump sum or required to take all of the inherited ira in a year--

correct???

Is this rmd then paid (anually to one of the two beneficiares)- who has the responsibility to

pay the 2nd benficiary half?

or can the rmd be setup to have the

distribution (1/2 rmd) go directly to each of the

two benficiaries ?

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