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Designating trust (RLT) as IRA beneficiary

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  • #16
    If you name your Trust as the beneficiary and your intention is for it to be a "see-through" trust, then your Trust will typically say separate irrevocable Trusts are created for each kid with the stipulations on distributions that you provide in your Trust, which the trustee you list will then have to follow. RMDs usually have a separate section and list rules about how they should be distributed, or more recently, allow for flexibility with how they are distributed allowing the taxes to flow through to your children vs taxed at Trust rates. Naming your kids as outright beneficiaries would not allow you to add stipulations on when they can receive the money and they'd open an inherited IRA in their own name and have complete control over how they distribute the funds over 10 years. For compliance, I am going to keep adding this is not legal advice and just my interpretation/hopefully an attorney can chime in here to give you the concrete confirmation that you're looking for
    Andrew Musbach, CFP® | Co-Founder & Financial Advisor at MD Wealth Management, LLC
    Financial Planning for Physicians | [email protected]

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    • #17
      While the kids are minors then the guardian would be making the decisions about what to do with the money that went to them outright.
      Once they are adults, the guardian is out of it and the kids make their own decisions, for better or worse.

      If you want input into the decisions past age 18, then setting it up so that the money stays in trust, not conduit, would permit the trustee to retain control. You could make an older adult the trustee to start and permit the kids to take over as trustee at some age you get to specify in the trust.

      The tax implications might make it best for the money to come out while the kids have little or no income, provided it will be used or invested responsibly. That might be easy to ensure if you die soon. There would be a number of years before the kids start working and the money would face a low tax rate when they "get" it- although the guardian would decide whether to spend it. If you die later, and for most of the stretch time the kids are earning income, then the tax rates on money coming out of the IRA would be higher, but still probably less than what would be paid by an accumulation trust.
      Is this addressing your plan?

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      • #18
        Originally posted by Andrew Musbach View Post
        If you name your Trust as the beneficiary and your intention is for it to be a "see-through" trust, then your Trust will typically say separate irrevocable Trusts are created for each kid with the stipulations on distributions that you provide in your Trust, which the trustee you list will then have to follow. RMDs usually have a separate section and list rules about how they should be distributed, or more recently, allow for flexibility with how they are distributed allowing the taxes to flow through to your children vs taxed at Trust rates. Naming your kids as outright beneficiaries would not allow you to add stipulations on when they can receive the money and they'd open an inherited IRA in their own name and have complete control over how they distribute the funds over 10 years.
        Ah ok, this is what I believe my document refers to as "subtrusts" which I didn't really think much of until you mention it now. So if I allowed the funds to pass as conduit, then the subtrusts are also bypassed and the money goes in their names - which may be OK while they're minors, but perhaps should be addressed differently as they get closer to age 18.
        It did get me thinking that if the minors are getting an annual distribution which the guardians would be in charge of, can the trustee of the trust funds retain control of spending to some degree (in case there was concern of guardians not spending/saving well) by withholding more of the trust funds? And even though as minors they would only need to take RMDs, could the guardians pull more out if they wanted (given the conduit set-up)?
        Best of both worlds would be taking distributions into the trust according to individual rules (vs trust rules), and taxed as individuals while trust still keeps control. I guess there's no way to make that happen?

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        • #19
          Originally posted by afan View Post
          If you want input into the decisions past age 18, then setting it up so that the money stays in trust, not conduit, would permit the trustee to retain control. You could make an older adult the trustee to start and permit the kids to take over as trustee at some age you get to specify in the trust.

          The tax implications might make it best for the money to come out while the kids have little or no income, provided it will be used or invested responsibly. That might be easy to ensure if you die soon. There would be a number of years before the kids start working and the money would face a low tax rate when they "get" it- although the guardian would decide whether to spend it. If you die later, and for most of the stretch time the kids are earning income, then the tax rates on money coming out of the IRA would be higher, but still probably less than what would be paid by an accumulation trust.
          Is this addressing your plan?
          My main concerns now are what happens if I die while they are young, so distributions as minors, and then young adults. I am assuming I will need to re-do trust once they are teens since they would be closer to the age of majority (with more funds coming to them) and more concerns about having more cash coming to them over 10yrs as young adults (assuming rules are the same then).
          My reason for having trust act as conduit now is to minimize distributions and taxes, because if I don't I'd have to sacrifice taxes for control, right?

          I almost wonder if I should put into trust instructions that IRA funds should be liquidated more rapidly when they are young (and tax implications less), while minimizing use of the funds in the trust, so that once they are over 18 they will be getting less coming to them (to be both taxed and squandered as young adults) while more funds will still be managed.
          The more I think about this, the more different scenarios that I think of and then wonder what the downsides would be...

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          • #20
            Once the money leaves the conduit trust, as it must once it comes out of the IRA, then it belongs outright to the kids. While they are minors, a guardian would manage the funds and decide about distributions. Once they are adults, the guardian has no authority. Money that came out early would simply belong to the kids, once they are adults.
            The trustee would have no control over the money once it leaves the trust. Since it has to leave the conduit trust as soon as it leaves the IRA, the trustee of the conduit trust would have no say in what the guardian does with the money while the kids are minors and no say in what the kids do with the money once they are adults.

            If you want the trustee to have control over the funds, the money has to stay in the trust, which means accumulation, not conduit.

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            • #21
              Originally posted by afan View Post
              If you want the trustee to have control over the funds, the money has to stay in the trust, which means accumulation, not conduit.
              What I was suggesting was that, while the children are minors, the trustee adjust the funds given by the trust in accordance with how much comes out of the IRA. Such that the IRA funds have to be spent while they are minors and there is less leftover for them to have on their own once they are 18yo. In other words, this would be a way to make sure that the guardians use their IRA funds wisely and maximize what is left in the trust. I suppose the same idea could be used once the children are young adults (though more risky than with an adult guardian of course).
              With a see-through trust, can the trustee decide how much to take out of the IRA (i.e. more than RMDs)? Perhaps it makes most sense to try to liquidate the IRA when they are young since those funds are 1. taxed, and 2. not controlled by the trustee.

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              • #22
                Originally posted by Snag75 View Post

                What I was suggesting was that, while the children are minors, the trustee adjust the funds given by the trust in accordance with how much comes out of the IRA. Such that the IRA funds have to be spent while they are minors and there is less leftover for them to have on their own once they are 18yo. In other words, this would be a way to make sure that the guardians use their IRA funds wisely and maximize what is left in the trust. I suppose the same idea could be used once the children are young adults (though more risky than with an adult guardian of course).
                With a see-through trust, can the trustee decide how much to take out of the IRA (i.e. more than RMDs)? Perhaps it makes most sense to try to liquidate the IRA when they are young since those funds are 1. taxed, and 2. not controlled by the trustee.
                If this is a conduit trust, then the trustee does not get to adjust the funds. ALL the money that comes out of the IRA HAS TO BE DISTRIBUTED to the beneficiary. That is what "conduit" means. The trustee has no choice about distributions. In a conduit trust, all the money that comes out must be distributed. There is no holding it in the trust. The trustee could take the money out faster than RMD, but what would that be intended to accomplish?

                Once the money comes out of the trust, the trustee has no say at all in whether the guardian saves or spends it. The guardian could save the money or spend it. I doubt it would be a good idea for the guardian to set out to spend all the money distributed as soon as it comes in, trying to avoid any accumulating. One of the biggest expenses coming up for your minor children would be college. Why spend that money while they are minors rather than preserving it for college? What would the guardian spend it on?

                It seems you want some older adult to decide about spending the money both when the children are minors and later when they are young adults themselves. If that is the goal, then your problem is the conduit trust. It is not designed to accomplish that.

                The thoughts on accumulation would be the concern that between ages 18-28 (or whatever ages of young adulthood) all distributions need to be out, meaning a young adult could be getting significant amounts of $$ per year directly to them and not managed by trustee. Isn't this a reason for accumulation trust still?
                Yes. One would need an accumulation trust to keep the money in trust. A conduit trust distributes the money as soon as it leaves the IRA. Once the IRA is empty, not longer than 10 years after your death under current law, the conduit trust would be empty. An accumulation trust can continue for their entire lives. Money would still come out of the IRA, but it would remain in the accumulation trust unless or until the trustee decided to make a distribution. An accumulation could be set up to let the child become the trustee at whatever age you specify. It could be set up to require an independent trustee to make distributions.

                From what you describe, you want an accumulation trust, not a conduit trust.

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