Catherine M. Censullo, CPA
Total Control Money and Tax Tip


Now that you have considered all the advantages and disadvantages of setting up a trust as your IRA beneficiary (see the May 5th Total Control Money and Tax Tip), you may have decided that because of your personal family situation, it makes sense to add this level of protection to your IRAs. 

You also now understand the basic trust requirements and have decided whether you want a conduit trust or a discretionary trust (see the May 12th Total Control Money and Tax Tip), but you want to know that you have avoided all the potential landmines that could stand in the way of accomplishing your original purpose in creating the trust.

This does seem awfully complicated, doesn’t it? Are you sure that this is the best way to go? I always like to try to keep things simple, don’t you? But simple may not fit the bill in your case. So what else do you need to worry about?

Here are a few other things you should verify:

  • Check your beneficiary form and make sure that the trust is actually listed on your IRA beneficiary form.
  • Check your IRA custodial agreement (or plan document, for your company plan) to verify that they will accept a trust as the beneficiary.
  • Check to make sure that your testamentary trust (if the trust is created under your will) specifically names your trust as the IRA beneficiary, not the estate and not “as per my will” as the IRA beneficiary in order to get the funds to your testamentary trust.
  • Check to make sure that it is OK for you to use the age of the oldest beneficiary for determining the life expectancy of the RMD distributions. If this is not appropriate, you need to set up a separate trust for each beneficiary.
  • Check to make sure that your trust does not have any provisions that require payment of estate debts and expenses. That could cause your trust to fail the see-through requirements. It is OK for your trust to pay trust administration expenses.
  • Check to make sure that you don’t use the word “income” in your IRA trust. That could trigger the use of the Uniform Principal and Income Act, resulting in potential payout problems for your trust beneficiaries, unless your trust is a QTIP trust.
  • Check to make sure that you have not put non-IRA assets in the same trust as IRA assets, if at all possible. Use a separate, stand alone, irrevocable trust.
  • Check to make sure that you have stated in the trust document when the trust will end.
  • Check to see if your trust will be assignable to your beneficiaries.
  • Check to see if your trust should have a spendthrift clause to protect trust assets.
  • Check to make sure you have explained to your beneficiaries how the payouts will be taxed to avoid post-death surprises.
  • Check to make sure that your trustee knows what to do after death, what professionals to hire to help them, and what level of discretion you desire for payouts to your beneficiaries.

So, now that you have set up your trust, what are the most important things your trustee needs to know to implement the trust after your death? These are the key points your trustee needs to know:

  • Do not under any circumstances, move the IRA into the trust. This would constitute a complete distribution of the IRA and kill the ability to stretch it.
  • Set up a properly titled inherited IRA:  “John Smith, IRA Deceased 11-14-14, f/b/o, John Smith Family Trust, beneficiary”.
  • Do not allow your IRA trust beneficiaries to roll over their inherited IRA assets. They must be moved via a trustee to trustee transfer. Any check made payable to the trust is considered a taxable distribution.
  • Distribute only the required minimum distributions from the inherited IRA to the trust annually. These distributions are taxable, unless they come from a Roth IRA. These taxes are paid by the ultimate recipient, either the trust or the beneficiaries of the trust.
Now that we have covered all the basics, reconsider your personal situation. If this still makes sense, but you have questions that need to be addressed, don’t hesitate to call the office and set up an appointment to discuss your situation in more detail.

Catherine M. Censullo, CPA

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