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RE: IRA Named to Trust

Mary Kay Foss — Wed, 08 Feb 2006 19:10:16 GMT

The last comments were from me. I forgot to log in first!

Mary Kay

RE: IRA Named to Trust

stlcpa — Wed, 08 Feb 2006 04:40:11 GMT

Mary:

Paragraph 1/4 - Yes, but do you know if the Wife, Son and Daughter can all agree (like in a settlement agreement) that if the IRA is used to fund the 250,000 outright, to give the Wife 250,000 plus 15% extra for income tax?

Paragraph 2 - Since the IRA is greater then the 50% QTIP interest for the Wife, some of the IRA will have to pass directly to the Son or Daughter. Since this is a direct passing through the trust of the IRA principal and not the IRA being held in Trust for multiple beneficiaries, I believe the IRA directly passing to the Son or Daughter will become an inherited IRA using the Son or Daughter's life for RMD. What do you think? Second question, since there is IRA passing directly to Son or Daugher can the Wife, Son and Daughter agree to give the Son or Daughter an extra 15% for income tax? (same as above).

Thank you so much for your help!

RE: IRA Named to Trust

Mary Kay Foss — Mon, 06 Feb 2006 18:08:34 GMT

This is a difficult situation because you have a mixture of specific bequests and ongoing trusts. Normally a specific bequest does not bear any income tax, so if you used the IRA to fulfill them, the estate or trust would be taxable and not the recipient of the funds.

Since the trust is the beneficiary of the IRA, if you use the IRA for any trust beneficiary - the life of the oldest beneficiary (the wife) must be used. Given that, I'd use the IRA to fund the QTIP because that's the life expectancy that you must use anyway.

Before 2000, a QTIP trust funded with an IRA had to require that the greater of the RMD or the income be paid to the surviving spouse each year. Rev Rul 2000-2 changed that and said that the spouse need only have the ability to request the greater of the RMD or the income. If the trust was not updated to the new language, you are in the situation that you expect -- the RMD being greater than the income.

I don't see why the relationship of the RMD and the income seem all that bad. The odd thing about funding any trust with an IRA is that trust principal is taxable income. It is far better that a livingbeneficiaryy pay the tax on that income than having the trust pay it. Some people complain that when the IRA funds the QTIP trust that the entire balance could be paid out before the next generation gets it. That's a risk, but you must deal with the assets at your disposal.

There is no provision for grossing up distributions because of the potential income taxes. If it's a taxable estate there is an income tax deduction for the estate tax on the IRD but that doesn't seem to make you whole.

Good luck.

IRA Named to Trust

stlcpa — Mon, 06 Feb 2006 05:08:53 GMT

These are the facts: Two main assets - Trust account of 900,000 and IRA - 840,000, left to his Trust (per the Beneficiary Designation Form), the Trust splits the assets: Outright = 20,000 each to 5 grandchildren, 25,000 to ex-wife, 250,000 to wife. The remainder is split - 50% in QTIP to wife (income for life then 50/50 to son and daughter upon death) and 25% to son (me) outright and 25% to daughter outright. I am the Personal Representative and Trustee. I am the step son of the wife. Our relationship is good. The Trust will meet the 4 requirements of Reg 1.401(a)(9)-4 Q&A-5.

Below are my questions on the IRA :

Option 1 - Split the IRA:

Can I split the IRA into Inherited IRA's for the Beneficiaries? I think I can because wife, son and daughter are Designated Beneficiaries and the son and daughter's inheritance is not a "sub-trust". Son and Daughter get 25% outright remainder interests.

If the IRA is split to fund the outright cash to wife and the 25% outright remainder interests to son and daughter, then can the Inherited IRA's be different amounts and can these amounts be grossed-up for future income tax? I have found nothing on this, but this seems only fair.

Does the IRA have to be split 50%, 25%, 25%?

Option 2 - Use the IRA to Fund the QTIP:

If the IRA is not split and stays in the Trust to fund the QTIP Trust Principal (50% of the residual estate), I understand that eventually the RMD will be greater than the IRA income, resulting in more money flowing from the IRA to the Trust then the QTIP Trust needs to pay out to wife.

Problem - the IRA is less than the QTIP Trust. What do I do with the extra IRA funds - use Option1?

Any ideas?

Thank you to anyone who replies!