A proponent of keeping funds in trust for beneficiaries, I wanted to look at the tax penalty for accumulation and conduit trusts receiving tIRA distributions, over 10 years. This does not consider other taxes like NIIT or state taxes or taxes on earnings, just federal tax on the distributions.
The assumptions are that the beneficiary of the $1m trust is a single person making a salary of $99k. After standard deduction, this puts them at the top of the 22% bracket, so every additional dollar of ordinary income, like tIRA proceeds, is taxed at 24% and up. The trust tax rate is 37%.
The following, with options 1 (all tIRA distributions go to an accumulation trust), 2 (all tIRA distributions go to a conduit trust and so the beneficiary), and 3 (tIRA distributions go half and half), shows a significant tax penalty for keeping tIRA proceeds in a trust for all but the highest earning beneficiaries.
Code: Select all
Options 1 2 3
Accumulation 1m 0 500k
Conduit 0 1m 500k
Trust tax 370k 0 185k
Ben tax 0 257k 120k
Total tax 370k 257k 305k
Trust funds 630k 0 315k
Ben funds 0 743k 380k
Total funds 630k 743k 695k
Penalty 113k 0 48k