Living Trust vs. Children as Roth IRA Beneficiary

[Guest Jim Collins]

My parents have set up an irrevocable living trust and are starting to place assets in it. They now have Roth IRAs with their 3 children as beneficiaries. Should these be changed so that the trusts are the beneficiaries?

[BPickerCPA]

Usually people set up REVOCABLE living trusts, not irrevocable ones.

Without knowing your parents intentions, there is no way to answer your question.

But I suspect that someone may have sold your parents on the idea of a trust, without there being a complete understanding of whether one was really needed.

[Guest Jim Collins]

You're right--my parents' trust is a revocable trust. Their overall goal with the trust is to use it as an AB bypass trust to minimize estate taxes. They have about 200,000 in their Roths and their other assets as about at the estate tax exclusion limit for each. Their attorney advised them to name their trusts as Roth beneficiaries, but he should he did not know the specifics regarding IRAs and trusts. Do you know if there is any difference in ability to rollover the Roths with the trusts vs their children as beneficiaries? Or should each spouse be the beneficiary? This appears to me to be a very confusing area. If you could point us in the right direction, it would be greatly appreciated. Thanks.

[BPickerCPA]

Again, you don't need revocable trusts in order to set up a credit shelter trust after death. Revocable trusts make more sense in some states than in others, because of how probate is handled.

No one here will be able to tell you how the credit shelter should be funded (which is the question you are actually asking). If the Roth is left to the trust, then you lose the ability to do a spousal rollover which means that the money has to start coming out of the Roth right away.

[Guest Jim Collins]

Thanks for the info about rollovers. That answers part of my (expanding) question. The other part is what are the pros and cons of spouse vs children vs trust as Roth beneficiaries. The trusts are for North Carolina, which I think is not a community propterty state. Thanks for your input.

[Bruce Steiner]

It's hard to know what your parents should do without knowing what they were trying to accomplish.

Living trusts are tax neutral. They are helpful in some cases (for nontax reasons), but in most cases they don't make the estate administration significantly easier, and (as may be the case here) they merely serve as a distraction.

Depending upon the terms of the trust, it may be possible for the survivor to do a rollover. There have been quite a few PLRs involving similar situations. Some of them permitted a rollover, and some of them didn't. I analyzed this in greater detail in my article on this subject in the October 1997 issue of Estate Planning. Your lawyer should subscribe to this publication.

Notwithstanding the loss of the income tax benefits of a rollover (and the potential Roth conversion in the case of a traditional IRA), some clients leave IRA benefits to the spouse in a marital (QTIP) trust rather than outright, to control the ultimate disposition of the principal. You didn't say whether this was one of your parents' objectives.

A more common plan would be to have Wills with a marital share (either outright or in trust) and a credit shelter trust, and for the spouses to leave their IRAs to each other. However, there may have been particular facts and circumstances in your parents' case that caused their attorney to recommend and them to select the plan that they selected.

Bruce Steiner, attorney

NYC and Hackensack, NJ

also admitted in FL