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Naming a trust as a beneficiary of an IRA has always been complicated. Now, the rules have changed – and it’s still complicated to most.
Under pre-2020 tax regulations, a nonspouse individual who was a beneficiary of a traditional IRA was entitled to “stretch” required minimum distributions (“RMDs”) over their life expectancy.
Since beneficiaries could elect to take distributions faster, some IRA owners didn’t want to give their beneficiaries the option to take distributions sooner than their life expectancy. So Congress provided a mechanism to name a trust as a beneficiary of an IRA and still get the favorable “stretch” post-death tax treatment.
With the new SECURE Act, which applies when an IRA owner dies on or after January 1, 2020, the rules have changed. The most significant change is that the definition of RMD for an inherited retirement account has changed so that all funds from the inherited retirement account must be distributed by the end of the 10th year after the IRA owner’s death.
Many of the trusts that were designated as an IRA beneficiary in the past provided that the trustee shall withdraw the RMD and distribute it to the trust beneficiary. This worked great when distributions could be stretched over a beneficiary’s lifetime. But with a new definition of “RMD” for an inherited retirement account, it could be both a “control disaster” and an “income tax” disaster.”
If, in the future, a conduit trust is used as a beneficiary of an IRA, perhaps the trust language should additionally provide that the trustee is authorized to take distributions in excess of the RMD and distribute them to the beneficiary. This could allow a trustee, for example, to make ten generally equal distributions to the beneficiary after the death of the IRA owner, rather than one large distribution that takes place ten years after the IRA owner’s death.
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Paul Rabalais
Estate Planning Attorney…(read more)
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What you say is not always true, some company only give a beneficiary trust Five years withdraw
Great work, very informative and educational . Thanks a lot
Mr. Rabelais,
Thanks for the fantastic content. I have a company that helps a lot of people in probate, divorce, foreclosure, and downsizing for retirement or assisted living. We shoot to offer a vertically integrated solution to help connect them to the right resources (we don’t take referral fees, liquidate assets most effectively for their situations, etc. We try to pick up where legal counsel leaves off, and work hand in hand with a lot of attorneys, and send people to attorneys like you to avoid probate in the future. My question is, what do beneficiaries usually do if the property is in a trust, and no probate is required. It seems like some beneficiaries would have parallel needs, since they’re still inheriting lots of property, getting new money, and navigating the legal process. Any insight into this? I haven’t been able to find many good resources, and so your opinion is valued greatly.
Mr R. Can you explain the mechanics of your post-SECURE Act boilerplate provisions for minor children? You say conduit language is pretty much falling by the wayside for non-designated beneficiaries and children but what is your plan for clients who approach you today with large QRP holdings? And I know it won’t help the estate attorneys much, but life insurance, as a replacement for the lost stretch might be a good option provided the client is insurable. An life insurance policy in an amount approximately equal to the IRA value could very well make up for the lost time-value of money for anyone on the 10 yr clock. Would you support this strategy for your clients? Maybe an idea for a future segment you can do? Cheers.
QUESTION IN AN IRRECOVABLE TRUST CAN A GRANTOR ALSO BE THE TRUSTEE? IF SO HOW? CAN YOU EXPLAIN A LITTLE MORE ON IRREVOCABLE TRUST. CAN I PUT MY BUSINESS IN AN IRREVOCABLE TRUST?