Mary Kay Foss

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.

Some providers will not issue an annuity to a Bypass Trust. There are rules that apply when an annuity contract is not held by a natural person. See Question 2 in Tax Facts 1. A revocable trust can hold an annuity as agent for the grantor but I think you have a problem with a Bypass Trust.

Taxable alimony and separate maintenance are considered compensation for purposes of both traditional and Roth IRAs.

Barry gave a great example and I don't think it leads to the conclusion that 10% is tax free each year. The calculation on Form 8606 is made each year that a distribution is claimed based upon the fair market value and unrecovered basis for that year.

The RMD is the Required Minimum Distribution; that is the smallest amount that must be withdrawn from an IRA each year to avoid 50% penalties. Roth IRAs do not have RMDs while the owner is alive and anything rolled over by the surviving spouse will not have an RMD. The B Trust would receive the RMD from the Roth each year. The trust agreement can specify that any Roth distributions will be principal of the B Trust. If the trust agreement is silent, you look to the state law. In California the Principal and Income act that became effective 1/1/2000 says that 10% of a retirement distribution is income and 90% principal. That means that the income beneficiary is supposed to be allocated 10% of the RMD; since the Roth isn't taxable there are no income tax consequences but it could deplete the B Trust to a certain extent.

There are probably a number of ways to achieve the result that you want. I would name the spouse as beneficiary of the Roth IRA and a trust (that qualifies as a designated beneficiary) as the contingent beneficiary. At the first death, the survivor can disclaim a fraction of the Roth that will be enough to fully fund the B Trust. The balance of the Roth can be rolled over by the spouse. When the trust becomes the beneficiary, it does not terminate. Instead a RMD will have to be distributed from the Roth to the Trust. Since Roth distributions are not taxable, the payments can be accumulated within the Trust and paid out in whatever way the trust grantor chooses. When the spouse dies everything owned will be subject to tax and can use up the exclusion.

I was consulted by a client who had the following situation. Her illegal alien husband had worked for a company for a number of years and used her social security number. She went to work for the same company (using the same SSN) and participated in the same plan as her husband. When she left after 2.5 years, she got an extremely large retirement distribution. She was thrilled and spent it. She later was sued by the employer to recover the plan funds that were intended for her husband and entered into a payment plan to repay the money. She was angry that the 1099R showed the entire distribution she received instead of what she was entitled to; the company's ERISA attorney said that the 1099R was correct and that she would make a Claim of Right calculation for each year she made payments back to the plan. She hired me to amend returns to In the meantime IRS sent a notice because she did not pay tax on the entire 1099R amount. She wrote IRS a note and said that pursuant to a lawsuit she was paying it back. The IRS thanked her and removed the assessment. She terminated her relationship with me because she had solved all her tax problems herself. Her husband still has no green card and continues to accrue benefits in the plan. Who says truth isn't stranger than fiction?

At my CPA firm we report the 1099R (that has a P designation) as part of a total distribution and then indicate a zero in the taxable distribution part of the Form. This seems like such an easy solution that I don't understand the problem. Usually the information about the plan is already proformaed because we had reported the income in the prior year.

A trust is often a better beneficiary for an IRA than a qualified plan. Most qualified plans with a nonspouse beneficiary pay out the benefits in a lump sum all in one or two years. This causes the income tax problem referred to above. If the benefits are rolled into an IRA, a trust beneficiary can manage the income taxes. This is because a qualified trust beneficiary can take distributions over the life expectancy of the oldest trust beneficiary.

Your mother cannot open a Roth IRA unless she is working. She needs as much earned income as the Roth contribution. A Roth IRA cannot be rolled over into a Roth for anyone but a surviving spouse. A beneficiary is required to take distributions after the owner's death but as Alf pointed out there are problems with a minor as beneficiary. The beneficiary can only take over at the death of the owner, attaining age 14 does not allow a change in the ownership or income stream. Why does she want to provide for retirement? Most grandparents are worried about college funding.

Unfortunately, you could be taxed in two states. When the same income is subject to tax in more than one state, you get a tax credit. In effect, you pay the income tax at the higher rate between the two states and you must file an additional return. I practice in California. When Roth first came in, CA was going to allow people who moved to the state after 1998 to escape taxation on the remaining years of the 4-year spread. Many people were planning to move out of the state for 1998, in order to avoid the CA tax (Nevada is nearby and has no income tax) so they did an about face. The current rule is that a resident must include in CA income the same amount that is in Federal income. If Ohio is going to tax you, I hope you didn't move here. The maximum rate is 9.3% and almost everyone must pay it. Good luck.

I agree with the previous response. Each custodian has their own agreement which must be followed. If the custodian does not allow separate accounts, the life expectancy of the oldest beneficiary must be used. You may have to move to another custodian just to get the split.

In general a beneficiary is not allowed to name a beneficiary of their own. Recently some IRA custodians have relaxed this rule but a profit sharing plan must follow the plan document, most of which are fairly rigid. As a nonspouse beneficiary, you're not allowed to roll your inheritance to an IRA. Many plans make the beneficiary withdraw the funds immediately. Depending on the age of the plan participant (and the plan document again), you may be able to take payments out over a 5 year period. The plan custodian should be able to give you more information. Keep trying to get something from them in writing. Good luck.

Anyone contributing to a Roth IRA needs to have earned income not just taxable income and $2,000 is needed to make the maximum Roth contribution. How the W-4 is completed isn't really relevent. The fact that there is a job where he's asked to complete a W-4 indicates that he probably has earned income. There are maximum AGI levels that preclude making contributions but I'm assuming that they don't apply.

It is a simple way to arrange things. I've seen beneficiary designations where the spouse is the primary, the children are next, the family trust third etc. It can be difficult to have two sets of disclaimers, especially if any of the beneficiaries are minors but usually you're just talking about the spouse's disclaimer. One of my clients has a spouse with a disease that renders her incompetent at times. His thought was to name the daughter as primary bene with the wife as contingent but he also wants his daughter to promise to disclaim if his wife survives him. I guess that's the only other downside is having a beneficiary who does not have the capacity to disclaim. Mary Kay

Barry I think you've convinced me. Disclaimers are a little more complicated in a community property state but my statement about the survivor benefiting from a late MRD was something I'd heard from a local attorney and didn't verify. I looked at GCM 39858 which specifically allows a disclaimer of an IRA and although it is not directly on point it's a good discussion. I guess that the late MRD is actually the decedent's income and receipt of it by the survivor is not an acceptance due to a right received as beneficiary due to the death of the decedent. Mary Kay

The instructions for 1099-R say that Code 5 is a Prohibited Transaction and Code J is a distribution from a Roth IRA. The Form is supposed to have a telephone number that you can call to inquire about the Form. Call the custodian and ask them to explain; you may have to be transferred to someone with more authority to get an adequate explanation or a promise to correct. The Forms aren't sent to the IRS until 2/28/2001 so you're doing the right thing by checking the form and getting back to the custodian before the end of February. The other strategy is to report it on your 2000 Form 1040 in box 15a and show a zero on 15b. You would also right ROLLOVER in the margin to the left of line 15. Good Luck.

In addition to the 9 month requirement, the person disclaiming cannot receive any benefits from the disclaimed asset before the disclaimer. This could be a problem if the decedent didn't take the final RMD before death. I always had to a "deathbed planning list" - take the current year RMD.

I don't have any sources in Washington but I'm wondering if the IRA were "assigned" to the spouse as beneficiary by the spouse as executor before Dec 31 of the year after death if you would achieve the same result. If a charity can be paid out early, can a nonqualifying beneficary like an estate be closed out early?

I think the excerpt from Notice 97-75 answers your question. The proposed regs at G-1A in (B) of the answer indicates that amounts distributed in a second distribution year are treated first as the current year distribution and then as the remainder of the first year distribution. Thus if the distributions were required, the $5,000 payment would have been comprised of the 2000 distribution ($1,500) and the 1999 distribution ($2,000) and the excess ($1,500) would have been eligible for rollover. Since the active participant is still working, the distributions aren't required and the entire $5,000 would be eligible for rollover. If that rollover wasn't accomplished within 60 days of the March 31 distribution, then nothing is currently eligible for rollover from that payment. The December 31, 2000 payment would be eligible for rollover (as I read the proposed regs) even if he were retired because the 2000 required minimum had already been paid.

I've run into a similar problem. Since you can't recalculate the life of a nonspouse beneficiary, payments from the inherited IRA would be coming out using a term certain after the owner's death. When the beneficiary dies, the term certain should not end but I find custodians cutting a check to the estate as soon as they learn of the death. This is not in accordance with the IRA document but many times the check is cashed and the family has lost the remaining stretch-out. When we've caught this in time and sent the checks back, we've been able to reinstate the term certain.

The previous answer is terrific but I had one additional thought. If the named beneficiaries disclaim and no contingent beneficiary is listed, the annuity may revert to the estate. That may allow for the distribution that you're looking for but here in California it would make the annuity a probate asset. Income tax ramifications should also be considered when looking into disclaimers.

Sorry. The cite should have been to 9739044. If you can't find it, email me and I'll forward it.

The 60 day rule applies to the participant not to the trustee or custodian. Sec. 408(d)(3) regarding rollovers provides an exception to inclusion in gross income for "any amount paid or distributed out of an individual retirement account ... to the individual for whose benefit the account is maintained" if it's rolled over within 60 days. Sec 402 also defines rollover as a "distribution to an employee of all or any portion of the balance..." It seems odd that the check would have such a stale date but often I see custodian-to-custodian transfers that take more than 60 days. One of our local employers often makes checks out to a custodian even when no rollover is contemplated and sends them to the plan participant. We've had no difficulties with this because the income on the 1040 has been higher than the zero balance on the 1099-R.

Form 5500-EZ is not required for a SEP. When the MP is over $100,000 you'll need to file for it.