QUESTION:
Hello,
I’m working with a retired client who has a sizable IRA. He set up a trust and named it as the beneficiary of the IRA, assuming that the trust would reduce or eliminate the income tax liability. Is this the case? Also, does a trust circumvent the 10-year rule?
Thanks!
ANSWER:
Naming a trust as IRA beneficiary does not reduce or eliminate the income tax on an inherited IRA. In fact, naming a trust as IRA beneficiary could exacerbate the tax liability. Trusts hit the top tax bracket (37% in 2024) when 2024 income exceeds just $15,200. Of course, the taxes could be shifted to the trust beneficiaries at their personal tax bracket, but the potential hit of the high trust tax rates still exists. Additionally, naming a trust does not circumvent the 10-year rule. In a worst case scenario, if the trust is designed improperly, the trust beneficiaries could be saddled with a 5-year payout. As we have said for years, do not name a trust as your IRA beneficiary unless there is a valid reason to do so and you know what you are doing.
QUESTION:
Has there been any clarification on the requirement and time frame for required minimum distributions (RMDs) for inherited IRAs during the 10-year rule? Specifically, for inherited IRAs where a parent had already started taking RMDs and the beneficiaries are not eligible designated beneficiaries? I know that the IRS delayed the need to take RMDs over the last few years, but has that been clarified yet for the future?
Thanks,
Mike
ANSWER:
Mike,
Yes, we do have guidance from the IRS on RMDs within the 10-year payout period. The SECURE Act dictates that when a non-eligible designated beneficiary (NEDB) inherits an IRA from a person who died after the required beginning date for starting RMDs, then annual RMDs must continue within the 10-year term. Since this rule created so much confusion, the IRS waived RMDs within the 10-year period for 2021, 2022, 2023 and 2024. For beneficiaries subject to RMDs within the 10-years, those RMDs must commence in 2025.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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