Funding QTIP with traditional IRA

[Guest AmyK]

Two questions regarding funding a QTIP with traditional IRA:

Consider married couple, second marriage for both, with "his" and "her" adult kids. Fairly typical A/B plan: Family by-pass trust and QTIP marital trust for wife. Husband is owner of traditional IRA. Husband is 68 years old, but in very poor health.

1) If the husband/IRA owner dies before his RBD, will the QTIP be considered a "qualifying trust" under the new proposed regs - so that surviving spouse can then use her life expectancy to calculate the RMDs?

2) If not, and the IRA is used to fund a non-qualifying trust (whether the QTIP marital or the Family "by-pass" Trust), so that a 5-year payout plan is required, then:

If the spouse is entitled to all income from the QTIP marital trust, will each year's one-fifth payout from the IRA be considered "income" and thus be payable on demand to the spouse?

Or can the trust language be drafted to limit the amount of IRA distribution that is to be "income", with the balance of the distribution being trust "principal"?

[Mary Kay Foss]

Most Qtip Trusts are drafted so that they do qualify. Check with the attorney to be sure.

When you use the 5-year rule, everything is paid out by the end of the fifth year. You don't remove 1/5 each year but the question of income vs principal on any IRA payments to a Trust depends either on (a) provisions of the trust agreement or (B) the state law. In California currently 90% of each payment is treated as principal. The good thing is it builds up the Qtip Trust, the bad thing is there are higher income taxes to pay.

Regarding your last point. Rev Rul 2000-2 changed the rules about the drafting of Qtips and how much has to be available to the survivor.