Martha Matthews, EA wrote:

- quote -

The catch is that the final regulations made clear you
cannot *add* beneficiaries after the date of death--so you
can remove problem beneficiaries but not add any. So if the
trust is the beneficiary, you have to be able to "look
through" the trust and cannot solve that problem by
distributing the interests out of the trust if the trust
didn't otherwise qualify, even if the trust allows you to
dissolve it by September 30 of the year following the year
of death.

When the proposed regulations came out, many were hopeful
the above would be allowed (since then leaving the IRA to
the estate wouldn't have been fatal to a long stretch out),
but the IRS indicated that was not what they had intended.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote in
- quote -

What about the new rules of "designated beneficiary"? I'm
not sure that it would work in this case but if the trust
could be terminated before you must name your "designated
beneficiary" then you eliminate the trust and hopefully the
daughter is the secondary bene.

This is written with a slow brain which doesn't recall all
the new DB rules but you might check them out.

Matha Matthews, EA

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Barry Picker wrote:

- quote -

I was reading too quickly and thought you had implied that
they could get the additional stretch out. I now see you
hadn't <grin> , and that solves the issue. I agree that can
get the no designated beneficiary treatment.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote:
- quote -

The right of the trustee to dissolve the trust and assign
the rights to the trust's beneficiaries has nothing to do
with the tax rules governing the payouts. Thus, a trust
that was not properly set up, resulting in no designated
beneficiary for the IRA, can still assign the rights to
receive the IRA to the beneficiaries under the trust
agreement. The beneficiaries will then have to take the IRA
distributions in accordance with the rules for no designated
beneficiary.

Barry Picker, CPA/PFS, CFP

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Barry Picker wrote:

- quote -

Wouldn't that still require that the trust qualify for "look
through" treatment? That is, if the trust had a
disqualifying provision, even if it was dissolved before
September 30 of the year following the year of death and the
assets assigned out, wouldn't they still have a problem of
having a zero life expectancy for the designated
beneficiary?

I know you know these rules virtually by heart <grin> , so I
thought I'd ask you before looking back on that one.

--
Ed Zollars, CPA
Phoenix, Arizona

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- quote -

When a trust distributes its income, then it has retained
nothing on which to pay taxes, thus the income tax liability
falls on the beneficiary(s). In the case you cite, let's
pretend that $100,000 is the distribution from the IRA to
the Trustee. And then then Trustee turns around and pays
out $100,000 to the beneficiary(s). Instant taxable income
of $100,000 to the beneficiary. It's the law of trusts -
they only pay tax on what they keep.

The tax rates for trusts climb faster than they do for an
individual, so in many cases, the tax is less when paid by
the individual beneficiaries than by the trust.

Linda EA in PA

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- quote -

You don't necessarily need a lump sum distribution, and in
most cases you would not WANT a lump sum distribution (or,
at least, you SHOULDN'T want a lump sum distribution).

You should be able to assign the right to receive the IRA to
the trust beneficiaries, assuming the trust is to be
dissolved.

Barry Picker, CPA/PFS, CFP

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- quote -

My guess is that full distribution would not be required,
since for all purposes other than what the terms of the
trust state, it will be treated as if the payments are
direct to the beneficiaries. Besides, that would be the
effect without that statute, so the law has to do something.

- quote -

If the trust gets the assets, the trust should pay the tax.

- quote -

Showoff!!!

Stu

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Guy Scharf wrote:

- quote -

A trust is an "interesting" cross between a pass-through and
taxable entity for federal tax purposes. In this case, it
is most likely that the final distribution from the trust in
closing it up would "carry out" the income from the
distribution and be reported on the K-1 for the beneficiary.
Technically, the issue is the income distribution deduction
given to the trust.

Note that this area gets complicated fast, and there are
some potential planning opportunities and significant traps
based on a number of factors. For instance, it's possible
that it may be to the benefit of the beneficiaries to have
this trust make the election to be "combined" with the
decedent's estate and then elect a fiscal year--that could
cause the income to "flop over" to the following tax year
for the individuals.

In unusual situations, it may even be preferable to hold off
on distributions, let the trust pay the income tax and then
distribute to the beneficiaries in the next tax year of the
trust. I say "unusual situations" because the fiduciary
income tax brackets are very narrow, and you hit the top
bracket very quickly, but there are rare situations where it
is still advantageous to hold the distribution in the trust,
though they are very, very rare.

If the numbers are at all significant, I strongly suggest
you get a professional involved who understands fiduciary
income taxation--and, frankly, that may be a tougher job
than you might expect <grin> , since most accountants have
little or no training in fiduciary accounting (which is
generally governed by state law)--but those rules can impact
things. As well, the state law rules can be overridden by
the terms of the trust itself.

--
Ed Zollars, CPA
Phoenix, Arizona

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- quote -

If the distribution is made to the trust, I presume a lump
sum distribution would be required if the trust is to be
dissolved and assets turned over to the sole beneficiary
within a few months.

In that case, how are the income taxes on the distribution
paid? Are they paid by the trust, or is the trust's final
return consolidated with the beneficiary, or something else?

We're in WA, so at least have only federal income tax to
worry about.

Guy

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Stuart O. Bronstein wrote:

- quote -

Correct--the question is whether you are allowed to "look
through" the trust for purposes of the minimum distribution
rules under the final regulations. However, that doesn't
mean that somewhat the federal government has effectively
revoked the trust agreement and now has granted rights
directly to the beneficiary of the trust.

The trust still governs and its terms would still govern the
receipt of any amounts distributed.

--
Ed Zollars, CPA
Phoenix, Arizona

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an_ordinary_guy_158[at]hotmail.com (Bill) wrote:

- quote -

The publication says that the beneficiary will be "treated
as" designated beneficiary. It doesn't say that the person
becomes the actual beneficiary, or that the distribution
must be made to that person directly. My guess is that the
distributions should be made to the trust (which is what
local law requires). Otherwise, all that language you just
quoted would be unnecessary.

Stu

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Guy posted:

- quote -

Pub 590 states in several places that an IRA must be
distributed within 5 years of the death of the owner.

Interestingly, at one point, the 2002 Return edition of Pub
590 states "If an IRA has more than one beneficiary *or a
trust is named as beneficiary*, see "Miscellaneous Rules for
Required Minimum Distributions." (Page 31)

Under the latter heading, "Trust as beneficiary" is one of
the subheadings. It states: "A trust cannot be a
designated beneficiary even if it is a named beneficiary.
However, the beneficiaries of a trust will be treated as
having been designated as beneficiaries if all of the
following are true:

1) The trust is a valid trust under state law ...

2) The trust is irrevocable, or will, by its terms, become
irrevocable upon the death of the owner.

3) The beneficiaries of the trust who are beneficiaries with
respect to the trust's interest in the owner's benefit are
identifiable from the trust instrument.

4) The IRA trustee, custodian, or issuer has been provided
with either a copy of the trust instrument with the
agreement that if the trust instrument is amended, the
administrator will be provided with a copy of the
amendment within a reasonable time, _or_ all of the
following:

[Boilerplate extending the details of pgh 4, above -- not
included for brevity.] (Page 34)

This seems to clearly direct you to distribute this IRA to
the daughter who is the named beneficiary for the Living Trust.
--------------

A more interesting issue is "how soon does that distribution
have to take place?" Since Pub 590 is replete with
statements that all assets of an IRA must be distributed
within 5 years of the owner's death (except in those
instances where it is inherited by a spouse of otherwise
qualified individual) ... it is possible that there might be
tax advantages to liquidating the IRA over a 5-year period.

The complexity of this issue is sufficient that it is not
surprising you have received conflicting opinions. I will
be most interested in reading other opinions on this matter,
since my own Living Trust was written more than 10 years
ago, at which point there was no specific ban on naming a
Trust as a beneficiary -- and I named the Trust ... with
separate instructions to the co-Trustees and successor
Trustee, that they should liquidate the IRA over 5 years in
order to save some $52K in taxes due (at rates then
applicable).

Having reviewed the succeeding editions of Pub 590 over the
years, I confess I didn't note when the ban against naming a
trust as beneficiary was slipped in -- though it wasn't
there in the edition consulted for the setup of the original
trust documents. And clearly, the IRS must recognize their
own ambivalence in this matter, since they make allowances
for handling the distribution where the trust is named as
beneficiary.

One must suppose that clarity is too great an expectation
for tax laws. <Grin
I look forward to other opinions.

Bill

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"Guy Scharf" <guy[at]spamcop.net> wrote:

- quote -

This looks like another situation where naming the trust
only added complexity, where none was needed. As you point
out, the IRAs where the daughter was directly named as the
beneficiary are not a problem; those IRAs can be paid out
over the daughter's life expectancy.

With the trust as the beneficiary, it's most likely that you
can assign the right to receive the IRA out to the daughter,
and also pay the IRA over her life expectancy. But it is
also possible that you will instead have to pay the IRA out
using the five year rule. It's impossible to tell without
knowing exactly what's in the trust agreement. I suggest
you have the trust reviewed by someone knowledgeable in this
area.

Also be aware that many custodians are not that
knowledgeable, and so you may not get the right answer from
the custodian. In addition, when YOU get the right answer,
the custodian may not always be cooperative, and you will
have to deal with their legal department before they will do
what you want.

Good luck.

Barry Picker, CPA/PFS, CFP

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I am getting confusing and contradictory information from an
investment firm on how to handle an IRA that names a living
trust as a beneficiary.

Person died in November at age 60, before taking any
distributions from traditional IRA. She had a revocable
living trust. One of her IRAs names the trust as the only
beneficiary. (Other IRAs name her daughter as beneficiary;
we have no problem with those.)

All trust assets will be turned over to the trust's
beneficiary, her daughter, probably within two months. Her
daughter is not a trustee of the trust.

How do we handle this situation now? What happens when the
trust terminates?

Thanks.

Guy

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