Roth IRA designation of trust as beneficiary

[Guest Jeff Brock]

What are the advantages and disadvantages of naming a bypass trust as beneficiary of your Roth IRA

[BPickerCPA]

This sounds like one of the essay questions that requires 3 pages in the test booklet to answer.

Since I already have my degree, I'll opt out.

[Dave Baker]

I found one article online that has some of that kind of information --

Minimum Distribution Requirements (IRAs and Qualified Defined Contribution Plans)

[Guest genea99]

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What are the advantages and disadvantages of naming a bypass trust as beneficiary of your Roth IRA>>

I have designated my Spouse as Primary and the Bypass Trust as Secondary. The intent is that if I pre-decease my spouse that she will disclaim the Roth which will put it into the Bypass Trust. I am working to get the Roth up to the Credit Shelter limit so that it can fully fund the Bypass Trust. The advantage is that the eventual distribution of the Roth, including gains, will be entirely free of tax. So in this regard this is superior to buy-and-hold stock appreciation since heirs would have capital gains tax bite from that.

A disadvantage of the Bypass Trust being a beneficary is that if my spouse pre-deceases me then my Roth cannot fund the Bypass Trust. A real significant disadvantage.

So it may be advantageous to use Roth to fund Bypass Trust but I urge you to get an expert to carefully explain the options and make the documents needed to carry out what you decide.:

You might find of interest some articles available at www.rothira.com "In Roth we trust" Article by Laura Saunders (Forbes, 4/20/98).

Quote from article: "Using a Roth IRA in combination with a trust offers enormous bang for the inherited buck"

---and "The Roth Legacy Trust(SM)" Article by Robert S. Keebler and Michael Bleck (exclusive to the Roth IRA Web Site, 3/27/98)

genea99

[Bruce Steiner]

See my column on this subject in the January/February 2000 issue of the CCH Journal of Retirement Planning. For information on this publication, see www.cch.com.

If you have sufficient other assets to fully fund your credit shelter trust, the issue will not arise.

If you do not have sufficient other assets to fully fund your credit shelter trust, there is a tradeoff. Using your Roth IRA to fund the portion of the credit shelter remaining after using your other assets avoids wasting the balance of the credit shelter. However, you give up some income tax deferral (since the spouse could roll it over into his/her own Roth IRA and name new beneficiaries).

As one person suggested, you can postpone the decision by naming the spouse as primary beneficiary and the credit shelter trust as contingent beneficiary. However, the tradeoff here is that a disclaimer trust is less flexible than a mandatory credit shelter trust, since the spouse can't have a power of appointment over a disclaimer trust, and can't participate in discretionary distributions to others from the trust in his/her capacity as a trustee.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL