Q: If I name my trust as my IRA beneficiary, can each of my trust beneficiaries
stretch RMDs?
A: Yes and no. Yes, they can stretch RMDs but the stretch is severely
limited, especially if you have trust beneficiaries with a huge age gap.
Assuming the trust qualifies as “see-through,” at best, RMDs may be calculated
based on the oldest trust beneficiary’s life expectancy.
Individual
beneficiaries of a qualified trust cannot stretch RMDs over their individual
life expectancies. Even though a “stretch” may be available, a multi-generational
distribution opportunity is eliminated.
Q: Will the IRA distributions be taxed at trust rates or individual
income tax rates?
A: That depends on the trust. Generally, a trust pays income tax on
income held inside the trust. When RMDs are required to be paid immediately
“through” the trust to individual beneficiaries, individual income tax rates
usually apply. Trust taxation can be very complicated and trust terms vary so
it’s important to consult with your personal advisors concerning any trust
taxation questions you may have.
Q: My wife passed away and our trust is the beneficiary. The IRA
custodian said the “5 Year Rule” applies, what does that mean?
A: The “5 Year Rule” means that the entire IRA must be fully
distributed no later than December 31st of the fifth year following the year
the IRA owner passes away. Basically, there are no RMDs since distributions are
optional until the fifth year. Of course, any amount can be distributed anytime
as long as the IRA is fully distributed by the 5 year deadline.
Q: I named my trust as my IRA beneficiary last year but I want my kids
to have a multi-generational distribution opportunity. I paid a lot of money
for my trust and I don’t want to pay more to have it amended, am I stuck?
A: No, you are not stuck and you don’t need to have your trust amended
because you changed your mind on that issue. In this case, you can simply
update your IRA beneficiary designation form by removing the trust as your IRA beneficiary
and directly name your individual beneficiaries. A trust can be a great planning
tool, especially for non-retirement assets, but always consult with your
personal advisers to make sure your trust and your beneficiary designation
forms are set up correctly to achieve your goals.
