Executor: settling IRA in a trust

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usagi
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Executor: settling IRA in a trust

Post by usagi »

The wife is the Executor for hr mother's estate. The deceased had a living trust established that indicates that the trust is to be distributed among 4 beneficiaries on a percentage basis. Two beneficiaries are adult individuals and two beneficiaries are charities.

So for example:

PersonA: 47.5% of the trust
PersonB: 47.5% of the trust
CharityA: 2.5% of the trust
CharityB: 2.5% of the trust

The trust has two main components:
Normal Securities held in taxable accounts and a traditional IRA.

Person1 and Person2 are adults.
The decedent was 96 years of age and did not take their RMD for the year. The total value of the IRA is just slightly greater than the total value of the amount designated to go to the two charities.

My initial thought was the way to handle this was to distribute the IRA to the charities which should transfer tax free to them and cover the 2.5% each of them were allotted in its entirety and then the remainder would be cashed out of the IRA, and taxes paid on the decedent’s individual tax return on the remainder of the traditional IRA and then distribute the reminder 50/50 to Person1 and Person2 along with the non IRA items.

So putting pretend numbers around this let’s pretend the trust consists of:

10K traditional IRA
90K securities
For a total of 100K

So each should get:

PersonA $45,000 + (after tax value of 2.5% of the IRA)
PersonB $45,000 + (after tax value of 2.5% of the IRA)
CharityA $2500 = (2.5% of 100K)
CharityB $2500 = (2.5% of 100K)
The other thought was perhaps the residual of the IRA could be rolled into two inherited IRAs for the two human beneficiaries to pay based on their own 10 year schedule.

I need guidance on the correct approach and how to setup the accounts. The bank and financial planner has told me the only option is to cash out the IRA but that simply does not sound right to me and they acknowledged this is not their area of expertise (even though they set up the trust).

I am sure there is likely to be some back and forth on this topic, but I do appreciate any guidance you care to afford.
GJ48
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Re: Executor: settling IRA in a trust

Post by GJ48 »

usagi wrote: Tue Dec 07, 2021 1:39 am ....The decedent was 96 years of age and did not take their RMD for the year....
Perhaps this will help you develop your plan. This past October I asked my rep at the charity where I have my donor-advised fund about a situation like this and received the following response:
....I have gotten an official response to your inquiry.

A member of my team has indicated that generally, IRA custodians have to document that the RMD is issued to the deceased named beneficiary in cases where the owner dies before taking the distribution.

The RMD is included as a line item on the Inherited IRA transfer form that we receive. While paperwork may vary per custodian firm, the RMD is factored in before the final payout to the named beneficiary....
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celia
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Re: Executor: settling IRA in a trust

Post by celia »

:confused
usagi wrote: Tue Dec 07, 2021 1:39 am The trust has two main components:
Normal Securities held in taxable accounts and a traditional IRA.
What do you mean here? How are those accounts currently titled?

Did the taxable accounts or IRA have listed beneficiaries? If so, that over-rules what the trust says.

The IRA can't be owned by the trust or by organizations since they don't have "life expectancies" (based on birth dates), but you can put IRA withdrawals into the trust (while paying the taxes). Perhaps the IRA custodian will allow Qualified Charitable Distributions (QCDs) to be written to the charities, since the IRA owner was over age 70.5. But don't be surprised if the bank can't answer that as IRAs are not held at a bank as often as you might think and thus the employees are not as familiar with all the withdrawal strategies.

As far as the not-yet-taken RMD, someone who turned 96 this year had to remove about 12% of the IRA as the RMD. Divide last year's ending value by 8.1 to find the exact value. (See IRS Pub 590-B, Table III, page 63 to see the divisors for each age.)

And the trustee needs to pay off all the deceased's bills and taxes before the remainder is distributed to the beneficiaries.
Last edited by celia on Tue Dec 07, 2021 5:27 am, edited 2 times in total.
prd1982
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Re: Executor: settling IRA in a trust

Post by prd1982 »

I was told that you must distribute 2.5% of the IRA and 2.5% of the taxable account to each charity. . The people get 45.7% of each. That is, equal distribution. Also why cash out the IRA the peopl6 will have 5 years to take it (I think)..
chemocean
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Re: Executor: settling IRA in a trust

Post by chemocean »

It took me many years to realize that an IRA of a deceased person in which a trust is named beneficiary is a distinct entity from the trust itself. That is why the titling on the beneficiary form for an IRA of the living person is "The trustee of XXX Trust". Funds are not part of the Trust itself until the Trustee distributes the funds from the IRA (separate entity) to the Trust, which is the taxable event. The trustee has the authority to determine the timing of the distribution of the IRA to the Trust within the time period allowed by law, and then the timing of the distribution from the Trust to the beneficiaries. If you put the funds from IRA in a living trust, those funds are income to Trust immediately and will be taxed at 37% after only about $14K.

I am not a lawyer, but I understand that most living (revocable) trusts become irrevocable trusts upon the death of the owner (grantor?) of the trust. There may be some advantages of keeping the irrevocable trust open to allow the beneficiary to spread the tax burden over the allowable lifetime of the IRA of the deceased person. There are also other tax-efficiency tricks that a CPA could address (using the $3000 exemption for a trust).

As said above, since the Trust is not a person, the lifetime of the IRA will be five years after death.

Again, I am not a lawyer, but understand that the beneficiary form of the IRA dictates how the funds are distributed and the timing is defined by the SECURE act. I don't know what happens when the language of the trust that has been transformed into an irrevocable trust conflicts with the timing of federal law.
chemocean
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Re: Executor: settling IRA in a trust

Post by chemocean »

chemocean wrote: Tue Dec 07, 2021 7:08 am It took me many years to realize that an IRA of a deceased person in which a trust is named beneficiary is a distinct entity from the trust itself. That is why the titling on the beneficiary form for an IRA of the living person is "The trustee of XXX Trust". Funds are not part of the Trust itself until the Trustee distributes the funds from the IRA (separate entity) to the Trust, which is the taxable event. The trustee has the authority to determine the timing of the distribution of the IRA to the Trust within the time period allowed by law, and then the timing of the distribution from the Trust to the beneficiaries. If you put the funds from IRA in a living the trust, those funds are income to Trust immediately and will be taxed at 37% after only about $14K.

I am not a lawyer, but I understand that most living (revocable) trusts become irrevocable trusts upon the death of the owner (grantor?) of the trust. There may be some advantages of keeping the irrevocable trust open to allow the beneficiary to spread the tax burden over the allowable lifetime of the IRA of the deceased person. There are also other tax-efficiency tricks that a CPA could address (using the $3000 exemption for a trust).

As said above, since the Trust is not a person, the lifetime of the IRA will be five years after death.

Again, I am not a lawyer, but understand that the beneficiary form of the IRA dictates how the funds are distributed and the timing is defined by the SECURE act. I don't know what happens when the language of the trust that has been transformed into an irrevocable trust conflicts with the timing of federal law.
Jack FFR1846
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Re: Executor: settling IRA in a trust

Post by Jack FFR1846 »

It's pretty clear that you need to hire both a CPA and an estate attorney. People too often do the "logical thing" only to find out that this was completely wrong.
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Lee_WSP
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Re: Executor: settling IRA in a trust

Post by Lee_WSP »

This is too complicated to address and borders on a legal opinion.

But, I will say you do not adjust for taxes. You distribute the IRA exactly as is.

The trust probably doesn't qualify for see through status because you haven't indicated that it was a designated beneficiary in the first place and a charity is a beneficiary of the trust.

Unless otherwise stated, you may divy up the gross funds in the most tax advantaged manner possible so long as everyone agrees, but even if they don't, you have some latitude.
Topic Author
usagi
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Re: Executor: settling IRA in a trust

Post by usagi »

All,

The trust is the beneficiary of the IRA, and Person A, PersonB, CharityA and CharityB are beneficiaries of the Trust.
Alan S.
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Re: Executor: settling IRA in a trust

Post by Alan S. »

usagi wrote: Tue Dec 07, 2021 3:25 pm All,

The trust is the beneficiary of the IRA, and Person A, PersonB, CharityA and CharityB are beneficiaries of the Trust.
What was her mother's DOD?
With respect to the IRA's (which apparently is only 5-10% of the trust assets) distribution period, if the trust is not qualified the IRA must be distributed over her mother's remaining life expectancy (about 3 years), or if the trust is qualified for look through, the 10 year rule will apply if mother passed after 2019.

The charities must be paid no later than 9/30 of the year following the year of death or the trust will not be qualified. In addition, the trust info must be provided to the IRA custodian no later than 10/31 of the year after the year of death or the trust also will not be qualified. Therefore, if her mother passed in 2020, due to the charities remaining as beneficiaries, the trust will not be qualified, and the IRA will have to be distributed in about 3 years, pending your response on the DOD.

I assume that your wife is also the trustee of the trust, since an executor is not responsible for trust owned assets.

Banks seem highly prone to thinking they have the authority as to when the IRA is distributed, when they don't. Since they mostly fail to understand the nuances, they are also prone to pushing for a lump sum distribution. The trustee of the trust should not be forced into agreeing to a lump sum distribution because the bank says so, but there could be other reasons to request a lump sum, particularly if the IRA balance is modest.

As for the year of death RMD, the trust (or the beneficiaries of the trust if they are assigned separate inherited IRA accounts), to the extent it was not completed by her mother, it should be distributed by the end of the year of death. If that's impractical, it can be distributed in the following year and a Form 5329 filed to request the IRS waive the penalty.

Please provide the DOD, thanks.
Topic Author
usagi
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Re: Executor: settling IRA in a trust

Post by usagi »

Alan S. wrote: Tue Dec 07, 2021 8:10 pm
What was her mother's DOD?
Her mother passed away late in July of this year. No RMD was yet taken.
I assume that your wife is also the trustee of the trust, since an executor is not responsible for trust owned assets.
Yes, my wife is the trustee of the trust.


In reading what you wrote I remain baffled, due to my own ignorance.

Taxes must be paid on the IRA, on the RMD or the full value. What confuses me is who pays the taxes in this case and who gets the benefit of the RMD. For example in past years the RMD distributions were reported on the deceased tax return.

One issue I am having is there is a will that points to the trust, but the beneficiaries of the will are not identical to the beneficiaries in the trust. The point being if the estate (outside of the trust) pays the taxes on the RMD via the decedents 2020 tax return does the actual proceeds of the RMD pass to the estate or does the proceeds from the RMD stay in the trust? Or if the entire IRA (it is not large (only 3-4% of the trust)is distributed this year who pays the taxes and which entity gets the proceeds, the residual estate or the trust beneficiaries. Obviously I am very confused on this point.

I do appreciate all the effort you are expending.
MarkNYC
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Re: Executor: settling IRA in a trust

Post by MarkNYC »

chemocean wrote: Tue Dec 07, 2021 7:08 am
As said above, since the Trust is not a person, the lifetime of the IRA will be five years after death.
Once the IRA owner reaches their Required Beginning Date for taking minimum distributions, the 5-year rule for distributions to the IRA beneficiary(s) never applies. In this case, the IRA owner died at age 96.
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Lee_WSP
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Re: Executor: settling IRA in a trust

Post by Lee_WSP »

What Mark said. It's an oddity since the remaining lifetime might be more than ten years and a better stretch than SECURE. That said, we can't know for sure when we'll die.
bsteiner
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Re: Executor: settling IRA in a trust

Post by bsteiner »

Since charity gets a share of the residuary rather than a dollar amount this should be possible. The lawyer handling the estate should be able to figure out the details.

However, why didn't the IRA owner have a beneficiary designation saying x% of the IRA to charity 1, x% of the IRA to charity 2, y% of the IRA to individual 3, and y% of the IRA to individual 4, with appropriate provisions in case one of the individuals predeceased the IRA owner? There was no purpose to running the IRA through a trust that provided for immediate distribution.
Alan S.
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Re: Executor: settling IRA in a trust

Post by Alan S. »

usagi wrote: Tue Dec 07, 2021 11:41 pm
Alan S. wrote: Tue Dec 07, 2021 8:10 pm
What was her mother's DOD?
Her mother passed away late in July of this year. No RMD was yet taken.
I assume that your wife is also the trustee of the trust, since an executor is not responsible for trust owned assets.
Yes, my wife is the trustee of the trust.


In reading what you wrote I remain baffled, due to my own ignorance.

Taxes must be paid on the IRA, on the RMD or the full value. What confuses me is who pays the taxes in this case and who gets the benefit of the RMD. For example in past years the RMD distributions were reported on the deceased tax return.

One issue I am having is there is a will that points to the trust, but the beneficiaries of the will are not identical to the beneficiaries in the trust. The point being if the estate (outside of the trust) pays the taxes on the RMD via the decedents 2020 tax return does the actual proceeds of the RMD pass to the estate or does the proceeds from the RMD stay in the trust? Or if the entire IRA (it is not large (only 3-4% of the trust)is distributed this year who pays the taxes and which entity gets the proceeds, the residual estate or the trust beneficiaries. Obviously I am very confused on this point.

I do appreciate all the effort you are expending.
Sounds like there is a pour over will in place. What is the stated IRA beneficiary on the IRA agreement? This makes all the difference in determining if the trust might be qualified for look through or not. If the estate is the IRA beneficiary and a pour over will transfers the IRA to the trust, the trust will NOT be qualified, and the 10 year rule will not apply. Mother's very short remaining life expectancy will apply to the IRA RMDs.

The 2021 year of death RMD cannot be reported on decedent's final return because it was not distributed while the decedent was still living. It will be reported to the entity or person who actually receives the distribution, and that entity can vary depending on when the distribution is made and to whom.
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usagi
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Re: Executor: settling IRA in a trust

Post by usagi »

It actually is not a pouroverwill if I understand the term, in other words it does not put outside assets into the trust at death. The will simply simply disposes of the real estate and belonging outside the trust to a subset of the beneficiaries of the trust.

The trust is definitely the beneficiary of the IRA.

And thanks for the tip about the decedents tax return.

What I now think we can do, since the total value of the IRA exceeds the total value of the share of the trust the two charities are to get, is distribute the total value of the charities share of the trust solely from the IRA. The logic being that the two charities will not have to pay tax on the IRA distribution. The amount that is left over from the IRA will then go to the two people and they will have to figure out what they want to do it, but their share will now be very small 2-4K or so the tax burden should be light.

Does anyone see anything wrong with that line of reasoning. I am hoping to do the distribution before years end so the trust can be closed out and only have to file this years tax return.
Last edited by usagi on Fri Dec 10, 2021 1:00 am, edited 1 time in total.
Luckywon
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Re: Executor: settling IRA in a trust

Post by Luckywon »

Has your wife retained an attorney to represent her as executor and trustee? Legal fees would be expenses of the estate.

What's the approximate value of the estate including the IRA's? If it's such that paying for an attorney would be burdensome that's a difficult situation.
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Re: Executor: settling IRA in a trust

Post by bsteiner »

usagi wrote: Fri Dec 10, 2021 12:19 am ...
What I now think we can do, since the total value of the IRA exceeds the total value of the share of the trust the two charities are to get, is distribute the total value of the charities share of the trust solely from the IRA. The logic being that the two charities will not have to pay tax on the IRA distribution. The amount that is left over from the IRA will then go to the two people and they will have to figure out what they want to do it, but their share will now be very small 2-4K or so the tax burden should be light.

Does anyone see anything wrong with that line of reasoning. ...
Getting a charitable deduction for the trust is more complicated than it may seem. The executor and trustee should be working with competent tax/estates counsel.
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usagi
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Re: Executor: settling IRA in a trust

Post by usagi »

I just wanted to thank everyone's participation in this thread it was very helpful. Thanks to all of you.
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