Is this a question you can help me with? Client’s husband & Wife had a living trust. Attorney suggested that all holdings be put into the trust or make the Trust the beneficiary. Husband died several years ago, in January, 2018 the wife died. There are two beneficiaries, brother & sister. Brother in New York state sister lives in Toledo, Ohio as did mom. We recently paid out the VA / IRA to the trust as beneficiary. I tried to get Mass Mutual to take back the check but was told that that could not be done. Any other choices here or do we just split the IRA proceeds 50 / 50 between brother & sister and do withholding and show that on the K1 to each of them?
Hello, Larry. Unfortunately, once the IRA was paid out to the trust, it was paid out as to any other beneficiary. The distribution is taxable and can’t be reversed. The payments to the trust beneficiary could have been limited to the annual minimum required distribution from the IRA. But after the full IRA balance is distributed it is too late for that. A trust is a nonspouse beneficiary and a nonspouse beneficiary cannot roll over funds distributed from an inherited IRA. A Form 1099-R will be filed by the IRA custodian reporting the distribution to the IRS. Income tax liability will be proportioned to the trust’s beneficiaries in accord with the amount of income they actually receive from it. If the trust retains any of the income instead of distributing it, it will incur income tax liability of its own.
I have a traditional IRA and am receiving RMD’s from it. My beneficiary form lists my wife as the primary beneficiary (80%) and my granddaughter the remaining 20%. But in a recent Slott Report email, it stated that if a traditional IRA beneficiary has two recipients named on one form, the younger must receive her RMD’s using the formula (and tax table) of the older recipient. To avoid this, thereby allowing a longer stretch period for the child, I would like to separate my IRA into two: creating a new one (B) for my granddaughter and transferring 20% of my IRA to it. My existing (reduced to 80%) would be modified to simply specify my wife as the beneficiary. All IRA’s remain within the same brokerage firm who manages the distributions. The IRS ruling states that this would not be considered a distribution. Is this plan okay?
Your proposal is perfectly proper and even recommended as the safest approach. There is an additional reason for splitting the IRA into two as well: A spouse beneficiary has valuable options with an inherited IRA that are not available to other beneficiaries — such as the ability to either take the IRA as a beneficiary or convert the IRA to an owned IRA — but these options are available only to a spouse who is the sole beneficiary of the IRA. So, in general, it can be a good idea to have spouse inherit IRA funds as a sole beneficiary.
Dividing one IRA into two will result in no tax cost if done properly. If you fail to do it while alive, all is not lost. Your beneficiaries can still divide the inherited IRA into separate IRAs during the year after your death. If this is done be December 31 of the year following the year of your death, your spouse still will become sole beneficiary of her IRA and your granddaughter will be able to use her own life expectancy for RMDs. But dividing the IRA now, in advance, will make things simpler for them later. As a bonus, it enables you to fund the two IRAs with different investments chosen to fit the needs of each best.