June 30, 2019 10:40 pm

IRAs Payable to a Trust

When you own an IRA, you can designate who you want to inherit it. This can be a spouse, a child, a trust, or your estate. There are different tax consequences for each type of designation you select. Here are two examples:

IRA payable to trust for the benefit of a surviving spouse. A decedent had an IRA payable to a trust that he set up for the benefit of his spouse. She was also the sole trustee of the trust. The question put to the IRS was whether she could treat the IRA as her own (i.e., name her own beneficiaries and delay distributions until she became 70½). The IRS ruled privately that because she was entitled to the decedent’s IRA as the sole beneficiary of his trust during his lifetime, she is effectively the individual for whose benefit the account is maintained (Letter Ruling 201923002) As such, if she receives a distribution of the proceeds of the IRS, she can roll it over within 60 days to one or more IRAs established in her name and avoid tax on the amount.

IRA payable to a trust for the benefit of children. A decedent set up a trust for the benefit of her four children. When she died, the terms of the trust required that the IRA, plus other assets in the trust, be distributed equally to the children (all of whom were adults). They wanted to have the IRA transferred to them via a trustee-to-trustee transfer where the title to the new account would be maintained in the name of the decedent, for the benefit of the child. The IRS ruled that each child is treated as the beneficiary of an IRA and that no taxable distribution occurred (Letter Ruling 201924020). However, in figuring RMDs for each child, the life expectancy of the oldest child (the shortest life expectancy) must be used.

Tax Glossary

Capital loss carryover

A capital loss that is not deductible because it exceeds the annual $3,000 capital loss ceiling. A carryover loss may be deducted from capital gains of later years plus up to $3,000 of ordinary income.

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