IRA left to a trust

[mactoolsix]

The following was asked of me, and not being that familiar with trusts, I'll ask it here:

"Has anyone dealt with an Inherited IRA FBO a trust?

I have an investment client who left his $800,000 IRA to his trust. I believe I can roll it over into an inherited IRA FBO the trust and make RMD on the oldest life of the beneficiary.

Question – can the trust distribute more than the RMD in any given year to cover expenses of the trust?

If if the trust is a conduit trust and the RMD over the life expectancy of the beneficiaries is allowed then the taxation passes from the trust to the beneficiaries?"


I know from Pub 590 - If the beneficiary is not an individual, determine the required minimum distribution for 2013 as follows.

Death on or after required beginning date. Divide the account balance at the end of 2012 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix C. Use the life expectancy listed next to the owner's age as of his or her birthday in the year of death. Reduce the life expectancy by one for each year after the year of death.
Death before required beginning date. The entire account must be distributed by the end of the fifth year following the year of the owner's death. No distribution is required for any year before that fifth year.

Thus the IRA cannot be rolled-over. And I'm sure it can distribute more than the yearly RMD - the remaining question - I assume the tax on distributions is paid by the beneficiaries, and tax on any non-distributed earnings will be paid by the trust.

I don't know if this is a complex trust or not.

Maybe you can help?
Thanks,
Mike

[Burke]

Thus the IRA cannot be rolled-over. And I'm sure it can distribute more than the yearly RMD - the remaining question - I assume the tax on distributions is paid by the beneficiaries, and tax on any non-distributed earnings will be paid by the trust.
Mike

You are pretty much correct, as I understand the question. Is this the only asset of the trust? Any distributions to the bene's must come from taxable income first (such as the IRA proceeds). The trust would pay any tax on net taxable income (after expenses have been deducted) which is not distributed.

[appelman]

You obviously need to examine the trust document.

You are pretty much correct, as I understand the question. Is this the only asset of the trust? Any distributions to the bene's must come from taxable income first (such as the IRA proceeds). The trust would pay any tax on net taxable income (after expenses have been deducted) which is not distributed.

I don't think you have any rollover options. And there shouldn't be any taxable income to the trust, if the IRA is the only asset, since you would be distributing anything you take out of the IRA, net of expenses.

[S T]

Am I wrong? I recently had a deceased person, that had named an IRA in Trust (yes Living Trust in Place), Brokerage house passed all to Trust, when I completed 1041 Return for Trust, the IRA disbursements were passed through thru the K-1 Beneficiaries. Of course the Trustee had disbursed the funds as the beneficiaries were anxious to receive $$ - it was only $35K to disburse.

Maybe if the Trustee contacted me first there was an opportunity for a rollover, but somehow I did not believe that was true for a Estate/Trustee as beneficiary.

Sandy

[Burke]

There is no rollover option. And it is possible that OP's situation is a Revocable Living Trust in which the proceeds usually pass through to the bene's. Not sure why the trust was named beneficiary unless there is a reason for it; i.e, a minor beneficiary? a disabled beneficiary? a spendthrift beneficiary? Other assets? This is a large amount of money. The IRA would not pass through probate anyway if it had any kind of beneficary named, (which is usually the reason for an RLT.) IRA accounts are protected from creditors for the most part, so that is not a reason to do it. IRA proceeds could fall into a trust if the named bene was deceased, and it went into the estate and the will directed it in a pour-over clause or other provision. And, you are correct, the trust document is key. What does it say? What is the trust's purpose? When one of my clients died a while back, his IRA was divided among 3 bene's, two adult children and a trust set up for the 3rd adult child, who had problems. The trust reported the distribution as income on the 1041 and paid the tax. Is the custodian in this case going to pay out the full proceeds to the trust? If the trust has no other assets, it doesn't make much sense; just another layer of paperwork and expense if the bene's are going to get the net proceeds after expenses. There is a rather extensive article in the American Bar publication (April 2013) which goes into much detail about a trust being bene of an IRA and the applicable tax provisions and codes, how disbursements are treated, etc. Recommended reading.

[mactoolsix]

I really appreciate all the responses - Thanks for the help!

When I grow up I want to understand trusts.

Mike