How to obtain Estate Tax exclusion for Roth IRA resources using "

[Guest cunz28]

In order to "fill" first a "B" Trust and finally an "A" Trust following the death of one then the other of a married couple for purposes of Estate Tax exclusion, we will have to include at least some or finally maybe all of the Roth IRA resouces. Is there any way other than withdrawal from the Roth and placing ownership in the respective Trusts to obtain the Estate Tax exclusion for both spouses?

[Mary Kay Foss]

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.

[Guest cunz28]

Thank you for your prompt reply. Another question about your reply: can you amplify on "When the trust becomes the beneficiary, it does not terminate. Instead an RMD will have to be distributed from the Roth to the Trust." Are you speaking of the "B" Trust here and what is an RMD?

[Fred Payne]

RMD distributions to the Trust should, by the terms of the Trust, be construed as "principal." Earnings on the principal would then become taxable income that ordinarily gets distributed to the Trust's income beneficiary. Distribution of principal is restricted by the terms of the trust.

[Mary Kay Foss]

The RMD is the Required Minimum Distribution; that is the smallest amount that must be withdrawn from an IRA each year to avoid 50% penalties.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.

[Bruce Steiner]

A portion of the distributions will be income for trust accounting purposes, and a portion of the distributions will be principal for trust accounting purposes. The allocation between income and principal may vary depending upon state law. This is relevant in the case of a marital (QTIP) or "A" trust, since the spouse must receive (or at least have the right to demand) all of the income of the trust. But in the case of the credit shelter or "B" trust, it shouldn't make any difference how much is income and how much is principal for trust accounting purposes, since distributions from a traditional IRA are all taxable (ignoring any basis if any nondeductible contributions were made), and distributions from a Roth IRA are all nontaxable, and if the Will is well drafted the trustees will have discretion to distribute both income and principal or to accumulate income, taking into account income taxes and all other relevant facts and circumstances.