Author Topic: Inherited IRA in a Trust - Taxes ?  (Read 1899 times)

tiberius72

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Inherited IRA in a Trust - Taxes ?
« on: October 29, 2019, 02:08:38 PM »
Hi there,

Recently my father-in-law passed away. The lawyer that created his living trust said, all accounts should go to the trust. After his passing, we learned that was not the best thing to do. As his IRAs had the trust as the beneficiary. My mother-in-law is the beneficiary. Unfortunately, she does not have too long, perhaps 2-3 years. I am now charged with trying to figure out how best to grow the funds and do the best thing from a tax perspective as my wife will inherit the trust.

I understand that the trust needs to be treated like a living entity, i.e. we need to file taxes. As the end of 20119 is not far, I am trying to do some tax planning. I read that the trust will be taxed on earnings.  See here (https://www.thebalance.com/2015-income-tax-brackets-estates-and-trusts-3504855). But, I am not sure how that can work, as the IRAs are inherited but inside of a trust. Will we need to pay tax on the gains within the mutual funds and again by my mother-in-law, she takes the required RMDs ? Or do they mean taxes due by the trust when monies are not in an inherited IRA but still in the trust? For example, interest earned when mutual funds are sold from the inherited IRA but monies are just sitting earning interest and not withdrawn via an RMD shortly after mutual funds are sold.

Any thoughts and guidance would be great.

Thanks in advance - sorry for the complex question.


gocurrycracker

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Re: Inherited IRA in a Trust - Taxes ?
« Reply #1 on: October 29, 2019, 07:58:25 PM »
There are a lot of nuances related to trusts that I can't give you a definitive answer on this. I'm also not a trust expert, with just basic knowledge of how they function.

Generally speaking, the IRA continues to act as an IRA inside the trust. This means that "income" is only from distributions. The trust will have income from the RMD, and then a deduction for passing that through to your MIL, for net zero income.

Once your wife becomes the beneficiary of the trust, RMDs will continue based on your MILs RMD schedule. Use of the trust means you won't have the benefit of the multi-generational stretch IRA.

I would recommend sitting down with a/the trust lawyer and getting expert guidance.

tiberius72

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Re: Inherited IRA in a Trust - Taxes ?
« Reply #2 on: October 29, 2019, 10:40:54 PM »
Thanks for your speedy reply !!