IRA Non-Spouse Beneficiary

[Guest rfh3]

If an IRA owner dies before the RBD, can a specified beneficiary force distribution of the entire IRA to himself or herself in a lump sum?

[Guest godmom]

My understanding is that a lump sum distribution is an option that the beneficiary always has.

My question is just the oposite. How complex and expensive is it to prevent a wastefull non-spouse beneficiary from receiving a lump sum distribution if the owner dies before 70?

I want comments on a chronological flow chart showing the expenses associated with this task.

Expense in setting up a qualified Trust? Cost of a Professional Trustee?

Expenses and Taxes after death? (Estate under $1M)

RMD to Trust, any tax to Trust? (After Trustee fee the balance of RMD is distributed to beneficiaries)

What are the Trust filing requirements?

Trustee to Beneficiaries Distribution, How is the distribution reported ? By who?

Trustee to Beneficiaries Distribution, How are the taxes reported? By who?

Is there any Income tax or any tax to the Trust? Even if the Trust does not retain any of the RMD?

Any other expenses and Taxes? Did I miss something?

Planners, CPAs, Attorneys, please give your input. Is there a point where the expense is higher than the IRA assets? (eg: Distributing a 150K IRA over 30 year life expectancy in a Trust that has a 5K Trustee annual fee, or expenses and taxes greater than 5K)

I need a chronological cook book badly.

Thank you, Godmom

[Bruce Steiner]

It is not difficult to provide for beneficiaries in trust rather than outright. Indeed, our clients virtually always provide for their children in lifetime trusts rather than outright, to protect the children's inheritances from their creditors, predators and spouses, and to keep the children's inheritances from being included in their estates for estate tax purposes. These reasons apply to IRA benefits just as they do for other assets.

It is not much more work to draft the Wills to provide for the children in lifetime trusts rather than trusts to a specified age or outright.

Obviously there is a point at which the amount involved is too small to be worth the effort. And in the case of IRA benefits, you give up some flexibility (in terms of being able to have older individuals as contingent beneficiaries -- see PLRs 200228025 and 200235038). So if the IRA benefits are relatively small, it may not be worth the effort to leave them in trust.

If each child's share is only $150,000, some people would consider this to be too small for trusts (unless the beneficiary has special needs). But others would go ahead with the trusts anyway, since the assets might grow over time.

But it is not particularly expensive or burdensome to administer a trust. Family members may not charge trustees' commissions; and if professional management of the money is desired, you'll pay about the same amount for that regardless of whether the money is in a trust or not.

A trust has to file an annual income tax return, but if the trust has a small number of accounts, that should not be particularly expensive.

Income taxation of trusts can sometimes be complicated, but as a general rule, distributions carry out income to the extent of the trust's income, and if the income exceeds the amount distributed, the trust pays the tax on the income it retains. Items generally retain their character. There are different rules for required distributions and for capital gains.

Most clients prefer to let the trustees decide whether to distribute to the beneficiaries the minimum required distributions (MRDs) from the IRA (or a greater or lesser amount), rather than requiring that the trustees distribute the MRDs to the beneficiaries. In this way, the trustees can consider both tax and nontax factors each year.

You should discuss all of this with your lawyer, who can give you specific advice as to how best to accomplish your objectives.

[Guest rfh3]

I like the trust idea and I have no bias against them. But you have to admit that finding a trustee is not always that easy. In small families, the family members may be less that optimal choices since they are takers under the estate plan in most cases.