Estates, IRAs, RMDs, and Beneficiaries: See-Through Trusts, Inherited IRAs, Roth Conversions, and the SECURE Act

Description

In bankruptcy, inherited non-spousal IRAs may not be protected from creditors. IRAs without a designated beneficiary are required to be distributed within five years of the owner's death if the owner was under the age of 70½. Giving a portion of an IRA trust to a charity can accelerate the taxation of the distribution. Naming a beneficiary is critical to lessen the tax burden on inherited IRAs.

Some beneficiaries may be too young to be competent beneficiaries. Establishing a see-through trust can be a viable alternative; however, specific trust criteria must be met to obtain favorable tax treatment, distribution over the life expectancy of the eldest heir. Trust tax brackets are high, with amounts over $12,500 taxed at 37% in 2018. Trust taxation brackets may be avoided by naming your child as a beneficiary. However, children under age 19 (24 if a full-time student) are subject to the kiddie tax on unearned income above $2,200 (in 2019) and the same high tax brackets.

The naming of the beneficiary and the timing of the RMDs after death are critical. IRAs can have separate beneficiaries with separate life expectancies and RMD requirements. For trust beneficiaries, this is not necessarily so. The determination of the beneficiary and calculations of required distributions are complex. Late and neglected RMDs are subject to a 50% excise tax.

Listen as Leon LaBrecque, JD, CPA, CFP, CFA, Chief Growth Officer of Sequoia Financial Advisors explains inherited IRAs, including RMD calculations, determining beneficiaries, and how the proposed SECURE Act impacts retirement planning. Understanding the implications of a taxpayer's named beneficiaries and identifying the implications of subsequent tax distributions is essential for CPAs, tax advisers, and preparers.