Paying IRA Funds To Trusts After The FCAA
After the death of the account owner, does it still make sense under the new law to pay funds from IRAs or other vehicles into trusts to protect the money for the beneficiary? (Traditionally, that’s been done for protection against lawsuits, divorce and estate taxes, etc.) Many will argue it doesn’t make sense anymore because of the high income tax rates on trusts.
Recall, however, that you can handle those higher rates by judiciously using Section 678 of the Internal Revenue Code in the drafting of the trust. This allows the income of the trust to be taxed at the beneficiary’s income tax rates, not the trust’s rates. Note that this refers to the so-called “accumulation trust” approach to planning for payments from IRAs and other vehicles to trusts on a “stretch” basis. It will not work in the case of a so-called “conduit trust,” because conduit trusts mandate that all IRA and plan distributions be paid to the designated beneficiary of the trust upon receipt. Note also that existing “accumulation trusts” may need to be modified in light of the new law in order to ensure the 10-year deferral period for payments to a “designated beneficiary” is achieved over the 50% shorter five-year default period. The key language for the drafting attorney to focus on is found in the Code of Federal Regulations Section 1.401(a)(9)-4, A-1:
“A designated beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan. The members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it possible to identify the class member with the shortest life expectancy.”
For example, if the trust includes a testamentary power of appointment to the surviving spouse of the beneficiary, with no age limit on the beneficiary’s surviving spouse, the trust will not qualify as a designated beneficiary because it is impossible to identify the class member with the shortest life expectancy.
Some Final Thoughts
Among all these strategies, the ones that work best in a given situation will depend on all the facts and circumstances. What’s important to note here is that they can be combined, if desired, to produce maximum benefits. For example, the amortization approach can be combined with the plan of leaving the remaining IRA-type assets to the lower-income-tax-bracket members of the family. It can also be combined with the life insurance and long-term-care insurance options.
James G. Blase, CPA, JD, LLM, is founder of Blase & Associates LLC, a St. Louis-area law firm practicing primarily in estate planning, tax, elder care, asset protection, and probate and trust administration. Mr. Blase is also an adjunct professor at the St. Louis University School of Law and in the Villanova University Charles Widger School of Law Graduate Tax Program.