tIRA in Trust for Minor (estate planning)

[moustachebar]

Hi MMMers,

I am considering calling for creation of a testamentary trust in my will since I have a minor child. In it would go everything left to them (so, if DS and I both pass, everything basically).

Access to principal should be straightforward; income such as dividends etc would be subject to the 37% tax if over $15k-ish I think. My stuff is mostly in tIRA though. To be able to access it would require removing it from the IRA even if leaving in trust, within 10 years. Is this also going to be taxed as income at the 37%?

Or am I misunderstanding and the trust can take a deduction by passing it to the individual for them to pay at the individual rate (assuming the trustee makes that decision)? I was told that somewhere about something, but my memory is foggy and rules keep changing, so I am quite unsure.

Thank you!

[secondcor521]

Whether the 10 year rule applies to an IRA inside a trust is something I would research; it might be different for that situation.

As for your question, the trust can generally distribute income to the beneficiary of the trust each year as long as that distribution meets the terms of the trust and any applicable state laws regarding trusts.  And yes, if it does so, the trust gets a deduction for that amount, and the beneficiary then pays taxes on it on their tax return.  Google "distributable net income" and "1041 K-1" to learn more.

The laws could change, I agree, but the DNI / K-1 stuff has been the case for the last seven years at least.

You could also just leave the IRA directly to your child.  If you (both) die while the child is still a minor, the court will appoint a custodian (you can recommend a custodian in your will) to manage the money on behalf of the child until they reach 18 or 21.  The only reason I know of to do a testamentary trust is if you want to delay that distribution past 18/21 (like to 25/30/35/40 or whatever).

[moustachebar]

Thank you! Yes, those terms led me back to what I had heard or read.

As I understand it then, if the trust is doing RMDs out of the IRA and giving them to the kid it can take a deduction on the amount distributed. But if not it would be subject to the high rate.

Your further commentary is spot on. I like some of the creditor and spousal protection that keeping a trust around can provide. But it comes at a high cost I guess; anything retained in the trust gets severely eroded. In a way this is the least crummy thing about losing ones parents young, and in other it kind of seems like piling on when it would be nice to let them exhaust it slower than 10 years.

But I guess that is the best one can do if trying to keep control past 28.

Thank you again!

[secondcor521]

Your further commentary is spot on. I like some of the creditor and spousal protection that keeping a trust around can provide. But it comes at a high cost I guess; anything retained in the trust gets severely eroded.

Depending on the state, inherited IRAs may have creditor and spousal protection just because they're IRAs.  Worth checking into if that's what's driving the decision.  I wouldn't want to put an IRA into a trust for that reason and end up paying high trust tax rates to get no (or perhaps little) additional creditor/spousal protection.

If it's more about keeping control of it until the kid is an older adult, that's a different thing.

[moustachebar]

I hadn't considered the protection of the IRA itself! It may only get them to 28, I'll look into that.

And I am conflating two different purposes, which I didn't realize. Like finding the product you need before determining the problem you are trying to solve.

I think the delay is something I do want. But with any luck I will be changing my plans some years down the line and won't need it anymore!

Thank you for your help!