IRA beneficiary as trust

Designating a Trust for a Non-Spouse as Beneficiary of an IRA (Individual Retirement Account)

This article address the Required Minimum Distribution (“RMD”) rules when a trust for the benefit of a non-spouse is named as the beneficiary of an Individual Retirement Account (“IRA”).

To address this topic, we’ll need to first address the RMD rules for a non-spouse beneficiary, and then look at how those rules are impacted by naming a trust for a non-spouse as a beneficiary of an IRA.

Let’s take an example. Let’s say Dad owns a $500,000 IRA. He wants to name his son (“Son”) as the beneficiary, but Dad is worried that Son will blow the money after Dad dies. Nonetheless, Dad dies and Dad’s IRA gets transferred to Son’s Inherited IRA.

Some people mistakenly believe that Son can wait until Son is 70.5 years old before distributions must begin. Others mistakenly believe that Son will be penalized if he takes distributions prior to Son turning 59.5. However, the rule is that Son may take distributions based on Son’s remaining life expectancy. So, if Son is 30 when Dad dies, the IRS tables indicate that Son has a life expectancy to age 83 (53 year remaining life expectancy). Son must take a minimum of 1/53 (about 1.9%) of the IRA starting in the year after Dad dies.

However, Dad’s concern is that, due to Son’s immaturity, or perhaps due to Son’s wife’s influence over Son, Son will take a distribution of the entire amount, and spend it, perhaps without even being able to pay the tax on that significant amount – this would create a tremendous problem for Son.

So Dad looks into the possibility of naming a “Look-Through” or “See-Through” trust for Son as the beneficiary of Dad’s IRA. The trust would require that, after Dad’s death, the trustee would see to it that Son would receive his RMD, and the trustee could make additional taxable distributions to Son if the trustee determined that Son needed them for his health, education, maintenance, or support.

If Dad properly sets up the trust, Dad knows that Son will be an income until age 83, and that Son’s basic living needs will be met. Dad will also know that Son will not be able to blow the entire IRA, so Dad will protect Son from himself (and perhaps Son’s wife).

There are four requirement of a trust that must be met to get the “Look-Through” or “See-Through” treatment. But when these requirements are met, you can look through the trust and use the life expectancy of the individual trust beneficiary for RMD purposes. An ineligible trust will require taxable distributions at a much faster rate.

Note that for purposes of this article, we did not address the following circumstances: when a surviving spouse is involved, when there are multiple beneficiaries and the concept of separate accounts, and we did not address naming a charity, an estate, or an ineligible trust as a beneficiary of an IRA.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450