PODCAST 86: What Should I Do If I’ve Named My IRA Beneficiary a Trust?

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Below is a transcription of the Ask Gregory Podcast 86 – What Should I Do If I’ve Named My IRA Beneficiary a Trust?

Gregory Ricks  00:00

Hey, welcome. I’m your host Gregory Rick’s a financial advisor here to answer your questions and help you win with your money.

Podcast Intro / Outro  00:09

On today’s episode of the Ask Gregory podcast, we have Wes Blanchard joining us from WJ Blanchard law. And he will be joining Gregory to answer the question, What should I do if I have named my IRA beneficiary a trust? We also have a complimentary download waiting for you on this topic. If you go to gregoryricks.com/podcast86.  Again, that is gregoryricks.com/podcast86

Gregory Ricks  00:33

I’m just going to share with you you might have a problem called taxes. Wes, could that be a problem?

Wes Blanchard  00:43

That’s generally an issue. Yeah. Yeah, they

Gregory Ricks  00:47

trust our tax rates, their taxes, ordinary income, and here’s the trust tax rates for 2020 to 10%. First 10%, that tax bracket is $0 to $2,750. The next tax bracket escalates up to 24% for 2751, through 9850. It’s $9,850. The next tax bracket, you see you’re already under 10,000. And you’ve already pushed to the 35% tax bracket at $9,851. Through 13,450. No, this is not like individual rights. This is trust tax brackets. And everything going into that trust, if it’s going to be inside that trust and taxed. Everything over $13,450 is taxed at 37%. So yeah, you might have a problem. If you’ve named your beneficiary, as a trust, trust are downgraded as a planning strategy after the secure act. Yeah, we were kind of disappointed with that. And I’m sure Wes will agree. And the new secure Act regulations do not change that the most trust beneficiaries will still need to empty and inherited IRA in 10 years. Now what we’re talking about, for the most part, non spouse beneficiaries. This is somebody other than a spouse, say your kids have adult age without disabilities, because there’s some exceptions to the rule. But for the most part, it’s non spouse beneficiaries that are adults without disabilities. We’ll simplify it at that. Now, the secure act, however, the regulations do clear up some of the confusion the secure Act has created in areas of trust. They also attempt to answer some long standing questions regarding trust that have come up in many private letter rulings over the years. And that’s one of the core things of that coaching program and conference I go to a couple times a year and a lot of what goes on and creates guidelines for us to understand going forward is the private letter rulings where they make decisions and determinations and that, you know, that would be law going forward. Right, Wes?

Wes Blanchard  03:42

That’s right. It’s always something you have to keep up on. Hopefully, it’s not changing at the pace that has been over the last couple of years. But look, these retirement plans are they’re shifting, they’re shaping up differently as we’re kind of moving into this new era. So it’s good to have a guy like you obviously putting the information out there. But you have to know what that means for planning as well.

Gregory Ricks  04:09

Yeah. And just everybody’s not versed on this to this extent. Now. Here’s an important thing. See through trust rules remain in the proposed regulations, the IRS keeps the existing see through or look through trust rules for trust under which trust beneficiaries can be treated as beneficiaries of an IRA if the trust meets certain requirements. So if you’re using a trust, or if an attorney is using a trust for a beneficiary of an IRA, it has to be a see through trust and to qualify what the IRS refers to as see through trust for our a distribution purposes, the trust must meet the following requirements Number one, and I’m gonna go over for here. Number one, the trust is valid under state law, or would be for the fact that there is no corpus. What does that mean? Wes

Wes Blanchard  05:13

corpus is principal. That’s what you’re talking about. Okay.

Gregory Ricks  05:17

So you understand that number two, the trust is irrevocable, or the trust contains language to the effect, it becomes irrevocable upon the death of the IRA owner or plan participant. Number three for the beneficiaries of the trust, who are beneficiaries with respect to the trust interests in the IRAs owners, or plan participants benefit are identifiable. So you have to have identifiable beneficiaries. The required trust document has been provided by the trustee of the trust to the custodian, or plan administrator no later than October 31 of the year following the year of the owners, death, that’s a hard deadline that can’t be broken. So they’ve got to be notified of the trust is that what that says the documentation, and sorry, okay, in addition to the above requirements, all trust beneficiaries must be individuals, or there could be no designated beneficiary on the IRA and the stretch option could be lost. So that’s in essence, kind of blowing up the plan. In that case, and the common error I seen, and you can elaborate on what you’ve seen, but when we see this, there’s a week when somebody’s trying to change a beneficiary, that’s a client of our firm, that we’re helping them with their money, when we see beneficiary changes all the sudden pop up, it gets us to ask questions, especially when it’s a trust, like, are you aware of these rules, because what we find, and there was a few cases last year where we had discussions, and then they realized this was being done wrong, and it was going to be a taxable event, when you Dad, you don’t know what’s going to happen. But if I see it going, if you’re doing planning in a way that’s going to cause that event, when you die, yeah, we’re going to make you aware of it. And the problem is they set up a trust, for this purpose, thinking it’s going to work, but it’s not a see through trust, your thought.

Wes Blanchard  07:40

That’s a huge issue. It’s a huge issue. You know, a lot of folks say they have a, we call testamentary trust, but they they set up a trust in their will. And then they fund this trust with IRA or 401k proceeds, not realizing that, sure, you can, you can leave it to a trust, but there’s regulations or guidelines on that. And so the 10 year rule is the biggest one, a lot of folks don’t understand that, you know, it’s only for 10 years, you have to pay it out, you have to get the fund the trust, and so the growth is capped. But there’s also a taxable issue, if you’re using what I call just a basic testamentary trust, where you’re setting guidelines about when they can, when they can access the money, how they can access the money, what what it’s used for, that’s kind of your your basic trust, you really need to have someone working on on that plan that understands this side of things. And frankly, if you aren’t interacting with financial professionals on a regular basis, I think it’s going to be difficult for you to really grasp that your everyday sort of will drafting attorney probably isn’t on the up and up about things like this.

Gregory Ricks  08:57

Yeah, and I’m gonna elaborate a little bit further here because if we, you’re utilizing a trust, and it’s not a pass through, then it’s a non qualifying trust. And here’s the RMD rules for that if a trust does not qualify as a see through trust, then the RA will be treated as if there is no designated beneficiary. And the post death payout will be based on the rules that apply when there is no designated beneficiary, a non designated beneficiary. Those rules require an IRA funds to be paid out to the trust based on whether the IRA owner or plan participant died before or after the required beginning date. The required beginning date is April 1 After the year of their 72nd birthday. So if the owner dies before the RBD the account must be withdrawn here. Get this if the owner dies before the RBD. The account must be withdrawn by the end of the fifth year after death. The five year rule there are no annual RMDs during the five year window. If the owner dies, owner after RBD RMDs must be taken over the deceased ra owners or plan participants remaining single life expectancy. That’s called the ghost life rule can do it and distress discretionary trust when determining which trust beneficiaries must be considered for payout to the trust. The proposed regulations keep the existing rules for conduit and discretionary trust can do it trust this type is merely a conduit to pass distributions from the IRA to the trust beneficiary when the conduit trust is a beneficiary of an IRA. The post death distributions are first paid from the IRA to the trust, then immediately from the trust to the beneficiaries of the trust. No Ira distributions remain in the trust the beneficiaries of the trust, then pay taxes on those distributions at their own personal income tax rates. And remember, few minutes ago, I gave you those tax rates. So if there’s money in a trust over $13,450, it’s going to be taxed at 37%. pretty hefty charge. There any thing to add Wes?

Wes Blanchard  11:40

No, I think that tax rate point was really what I was going to get out to is, it’s important to understand that when you’re holding money in the trust, and it makes that money, it’s taxed significantly. So you really want to pass it through if you can.

Gregory Ricks  11:55

So couple rules there. I’ll I’ll throw in there that you should check beneficiary designations every year in case there’s been life events that would cause you to change that and we could have a whole show just on that topic. And if you have a trust that’s a beneficiary of your IRA, you need to have that reviewed forthwith. It’s like now soon as possible, out there, and I’ll think, then, you’ll find out where you stand and if you’re in good shape, or you might need to make some changes going forwards.  Thanks so much for listening to ask Gregory, where we answer your financial questions. You can find us anywhere Podcasts can be found and on YouTube and Facebook Live every Saturday from 10 to 1, subscribe, leave a review and tune in next time.

Podcast Intro / Outro  12:47

We’d like to give a big thank you to our guests Wes Blanchard for joining us on this episode. And don’t forget we have a complimentary download waiting for you on this topic. If you go to gregoryricks.com/podcast86 Again that is gregoryricks.com/podcast86

Podcast Intro / Outro  13:06

Gregory Ricks & Associates is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Gregory Ricks & Associates are not affiliated companies. Gregory Ricks & Associates, The Total Wealth Authority is our trademarked tagline, it does not promise or guarantee investment results or preservation of principal nor does it represent a certain level of skill. Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Gregory Ricks & Associates is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Gregory Ricks & Associates. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by those owners of Gregory Ricks & Associates is stated or implied Gregory Ricks & Associates has a strategic partnership with tax professionals and attorneys who can provide tax and/or legal advice. AEWM, Gregory Ricks & Associates, WJ Blanchard Law, LLC, J Heath & Co. and Mortgage Gumbo are not affiliated companies. This show is a paid placement.