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trust812
Level 2

Taxes when a Trust is listed as a Beneficiary on an IRA

My father and I have a dilemma. My Dad wants to leave my sister money from his IRA but as the Successor Trustee he wants me to manage the money through his Trust so that my sister doesn’t get the money all at once because she is a spendthrift. My understanding is that if his Trust is listed as the beneficiary on his IRA then the IRA distributions will go directly to the Trust for me to manage for the benefit of my sister but will be taxed at a whopping 37.5% tax rate. Is that correct and is there any way around this?

6 Replies
tagteam
Level 15

Taxes when a Trust is listed as a Beneficiary on an IRA

You need to consult, in-person, with an estate planning attorney.

 

See https://www.avvo.com/estate-planning-lawyer.html

 

Trust income tax rates are highly compressed and, therefore, the top marginal bracket is reached very quickly.

 

Regardless, what you want is something on the order of a trust with spendthrift and asset protection features and, although the laws are generally similar from state to state, they do vary slightly. As a result, you should retain local tax/estate planning counsel.

trust812
Level 2

Taxes when a Trust is listed as a Beneficiary on an IRA

What you say is true and I should consult a tax professional, but with that said what I have read so far from several articles on the internet by tax professionals, being able to manage the IRA distributions for my sister in the Trust comes with a price, a much higher tax bracket if it’s taxed in the Trust vs. listing an individual as a beneficiary on the Trust.

trust812
Level 2

Taxes when a Trust is listed as a Beneficiary on an IRA

And by the way, I am finding that not all Estate Planning Attorneys are good accountants that know the tax laws inside and out!

tagteam
Level 15

Taxes when a Trust is listed as a Beneficiary on an IRA


@trust812 wrote:

And by the way, I am finding that not all Estate Planning Attorneys are good accountants that know the tax laws inside and out!


Find one with additional credentials. For example, an estate planning attorney with an LL.M in taxation or who is also a CPA (or otherwise has a background in trust/estate taxation).

Critter-3
Level 15

Taxes when a Trust is listed as a Beneficiary on an IRA

This is very  true so having a financial planner well  versed in income tax rules should be part of the planning team.  

trust812
Level 2

Taxes when a Trust is listed as a Beneficiary on an IRA

I will find one and when I have an attorney create my own Trust I will make sure that they have the credentials that you mention. I sincerely doubt there is any way around what I describe. Either my sister gets the funds directly and squanders them or the Trust gets taxed to death if the IRA distributions goes to the Trust. Unfortunately there are too many unethical tax advisors that bend the rules and sometimes their clients pay for it.

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