If you hold significant assets in one or more individual retirement accounts, you might want to consider setting up a special type of revocable living trust that’s specifically designed to act as the beneficiary of your IRAs after you die. This type of trust is referred to by a few different names, including an IRA Trust, an IRA Living Trust, an IRA Inheritor’s Trust, an IRA Stretch Trust, an IRA Inheritance Trust, or a Standalone Retirement Trust. An IRA Trust is a special type of revocable living trust designed for the sole purpose of holding your IRA accounts for the benefit of your loved ones after your death. You can establish different sub-trusts within the IRA trust agreement for the benefit of your beneficiaries, including your spouse if you’re married. You can design each sub-trust to fit the unique needs of each beneficiary. RMD Rules for Trusts Inheriting IRAsThe post-death RMDs for a trust named as an IRA beneficiary will be calculated under either the stretch payout rule, the 10-year rule, or the 5-year rule, depending on certain attributes of the trust and the trust beneficiaries. It matters whether the trust qualifies as a see-through trust, whether it is a conduit trust or an accumulation trust, and whether the trust beneficiaries are non-individuals, “regular” beneficiaries, or part of the new class of “eligible designated beneficiaries.” The application of the RMD rules to these different types of trusts and beneficiaries is outlined in Exhibit A. The analysis of which RMD rule applies is not always clear, and there are aspects of the SECURE Act that will require clarification through IRS regulations. For these reasons, among others, it is important to involve your estate planning advisor in any decision to name a trust as an IRA beneficiary. You will want to confirm that your reasons for naming a trust as your IRA beneficiary are reflected in the trust terms and will not be negated by the RMD payout rules. It is also important to review beneficiary designations to be sure that any trust beneficiaries are appropriately named. It is important to note that the RMD payout rules are different than the payout rules of the trust. Even if an IRA must pay out under the 5-year rule to a trust named as the IRA beneficiary, it does not necessarily mean that the IRA assets will distribute out to the trust beneficiaries within five years. Instead, the terms of the trust regarding distribution to trust beneficiaries will apply. For example, if the trust is completely discretionary, then once the IRA assets are distributed out of the IRA to the trust itself, the after-tax proceeds of the IRA will remain invested with other assets of the trust until the trustee exercises its discretion to make a distribution to one or more of the beneficiaries. An inherited IRA refers to an IRA that is passed from the original account holder to a beneficiary after the account holder dies. It is important for people to understand the inherited IRA rules for different beneficiaries and heirs. Whether you will have to pay tax on an inherited IRA will depend on the type of IRA that you are receiving under the inherited IRA rules. You will usually not have to pay inherited IRA taxes if you inherit a Roth IRA. If you inherit a traditional IRA, you will generally have to pay taxes. Spouses and non-spousal beneficiaries have different rules for inherited IRAs. The taxes on an inherited IRA will be assessed at the time that distributions are taken unless it is an inherited Roth IRA. What are the inherited IRA rules?Taxes on an inherited IRA are assessed on the distributions that you take in the year that you take them. There are different inherited IRA rules for spouses and non-spouse beneficiaries. Spouses who inherit IRAs have several options under the inherited IRA rules. They may opt to treat the IRAs as their own or to instead to be treated as if they are non-spouse beneficiaries. Under the inherited IRA rules, spouses can choose to roll the assets over into their own IRAs so that they will not have to begin taking required minimum distributions before they reach age 70 1/2, which might help them to avoid being pushed into a higher tax bracket and being forced to pay more tax on an inherited IRA. Non-spouse beneficiaries must begin taking required minimum distributions within one year of the deaths of the original IRA account holders under the IRA distribution rules for beneficiaries. If they do not, they will have to withdraw the entire balances within five years of the original owners’ deaths. Non-spouse beneficiaries can withdraw the money at any time, but they will have to pay inherited IRA taxes on the amounts that they withdraw. Traditional inherited IRAs are traditional IRAs, SEP IRAs, and SIMPLE IRAs that are left to beneficiaries when the account owners die. SEP IRAs and SIMPLE IRAs become traditional inherited IRAs after the account holders pass away and follow the same rules. Inherited Roth IRAs allow the beneficiaries to take withdrawals without paying taxes. However, they cannot choose to keep the money in the Roth IRA accounts like the original account holders were able to do. Inherited 401(k) accounts are 401(k) plans that are inherited from spouses or from non-spouses. Just like you have to pay tax on an inherited IRA, you also have to pay tax on an inherited 401(k). Under the rules on an inherited 401(k), the taxes on an inherited 401(k) are assessed at the time that you take distributions. The inheritance tax rate when you take distributions from an inherited 401(k) or a traditional IRA is your ordinary income tax rate. The rules on an inherited 401(k) differ depending on whether you are a spouse or a non-spouse. The inherited 401(k) rollover rules allow spouses to roll the funds over into their own accounts. However, the inherited 401(k) rollover rules do not allow non-spouse beneficiaries to roll the funds over into their own accounts. You can roll the funds over into an account that you have designated as an inherited IRA under the inherited 401(k) rules. Importance of choosing a beneficiary for your IRAUnder the IRA beneficiary rules, the proceeds of your IRA are not passed through the provisions of your will. It is vital for you to choose a beneficiary for your IRA. If you do not, the proceeds of your IRA will pass to your estate and will be passed according to the intestacy laws of your state instead of how you might wish the account to be handled. When you open your IRA account, you can designate a beneficiary under the IRA beneficiary rules on the beneficiary designation form. This form allows you to specify how the funds in your account will be handled after you die according to the IRA beneficiary rules. You can name your spouse, child, friend, or a charity or trust as the beneficiary to your IRA. In addition to knowing the IRA distribution rules for beneficiaries, there are some other factors that you should consider. You first need to determine whether you are listed as a beneficiary of another person’s IRA. Remember that under the IRA distribution rules, the beneficiary who is named on the beneficiary designation form will receive the proceeds of the IRA. The beneficiary designations supersede wills. If you are named as a beneficiary and are inheriting an IRA from a parent or have inherited an IRA from a spouse, you should request a trustee-to-trustee transfer of the funds in the inherited account. The distributions from an inherited IRA can be invested in other accounts. You should also make certain that you understand the IRA RMD rules for beneficiaries. IRA Trust Administration LawyerWen you need an IRA Trust Administration Lawyer, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
Ascent Law LLC
8833 S. Redwood Road, Suite C West Jordan, Utah 84088 United States Telephone: (801) 676-5506
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