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The SECURE Act and Non-Designated Beneficiaries

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I don't know if this is the right place to ask, but I am struggling with how to insure accessible funds for the successor trustee for a revocable living trust for final expenses, taxes, trustee fee, unnamed charitable gifts, etc. Most of our assets are tied up in IRA's, Roth's and other assets governed by beneficiary law.

Scenario: Husband and wife are owners and co-trustees of a revocable living trust. Husband has a Roth at a brokerage firm with the wife as primary beneficiary and the living trust as contingent beneficiary. He passes first. The wife either leaves his Roth as inherited from him (probably not good due to 10 year distribution requirement, right?) or she transfers it to herself and maintains the living trust as the primary beneficiary. I realize that the living trust is a Non-Designated Beneficiary and must be distributed within 5 years.

Wife passes. Can the "final" successor trustee, a child say, use these Roth funds by transferring some or all of them to a taxable checking account, say, to pay final expenses, gifts to unnamed charities, taxes, trustee fee, etc. and then finally distribute any remaining funds to the ultimate trust beneficiaries, the children in this scenario?

I would appreciate your thoughts, comments, suggestions. However, any drastic moves away from the described account types would not IMHO be a feasible move.

Thank you.   :-)))

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Re: The SECURE Act and Non-Designated Beneficiaries

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Erperez, thank you for the thoughtful suggestions and links. I agree that the question to answer is what the spouse does with the Roth. The kids are taken care of as sole, equal beneficiaries of the trust and estate as well as named beneficiaries of all other IRA's and Roth's (along with a small amount in an IRA to named charities).

This is what I am proposing:

  • Create new Roth from existing Roth or new Roth conversion - we are old enough and Roth's old enough to allow this
  • Make spouse primary and trust contingent - covers if spouse dies 1st or we die together
  • If I pass first, spouse makes Roth her own in new Roth as required and makes trust primary
  • Spouse passes, the successor trustee has full access to new Roth funds for all uses
  • Successor trustee makes sure all IRA's and Roth's are distributed to proper beneficiaries - kids and a few name charities
  • Successor trustee distributes all remaining trust and estate assets to kids and closes the trust 

PS: Passed by TIAA lawyer that although couldn't give legal advice but stated that my solution seems to fit my goals.   :-)))

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Re: THe SECURE Act and Non-Designated Beneficiaries

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SECURE Act put 5/10 year limits on IRA money, whether inherited by individuals or channeled via living trust.

But living trust can hold other monies [i.e. non-IRA] for a long time. SECURE Act doesn't say that entire living trust has to liquidated in 5/10 years. But its revocable nature does change to irrevocable after the death of grantor/trustor.

YBB
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Re: THe SECURE Act and Non-Designated Beneficiaries

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Yogi, the duration is not really critical. I am interested only in the year or so after last spouse passes and the successor trustee needs to clear expenses, charitable gifts and take care of beneficiaries.

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Re: THe SECURE Act and Non-Designated Beneficiaries

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There’s a “trustee powers” paragraph in the 3 living trusts I have seen.  I was the trustee for 2 of them.  All have said the trustee can do whatever they want with assets.  I am certain yours says the same and you should have no problem paying expenses.  The successor trustee could keep the money invested, convert it to cash, or whatever.  

FYI, in one case, I had a lawyer do much the work or at least guide me through the process.  But when I contacted Fidelity, all they looked at was the page of the trust that said I was the trustee, the death certificate, and the powers page.  They didn’t care much about the rest of the document.  It was my job to settle it per the wishes in the trust.  I seem to recall they only copied those pages.  And the bank did the same thing.

 

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Re: THe SECURE Act and Non-Designated Beneficiaries

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@gilvkona wrote:

There’s a “trustee powers” paragraph in the 3 living trusts I have seen.  I was the trustee for 2 of them.  All have said the trustee can do whatever they want with assets.  I am certain yours says the same and you should have no problem paying expenses.  The successor trustee could keep the money invested, convert it to cash, or whatever.  

FYI, in one case, I had a lawyer do much the work or at least guide me through the process.  But when I contacted Fidelity, all they looked at was the page of the trust that said I was the trustee, the death certificate, and the powers page.  They didn’t care much about the rest of the document.  It was my job to settle it per the wishes in the trust.  I seem to recall they only copied those pages.  And the bank did the same thing.

 


Yes, our trust says pretty much the same thing that the trustee can do whatever he/she wants as if the funds are his/her own. I also recall that if anybody contests it they can be excluded from the distributions. But I would have to dig that out.

So, you appear to agree that the trustee should be able to take out the Roth assets that are granted to it as a beneficiary and use the sums to settle everything, correct?

I also believe that the trustee can NOT reach into any funds that are covered under beneficiary law if cash is needed. I guess the kids would have to kick back some bucks if that situation happens but this discussion is trying to avoid that problem and fire sales too.

I expect that the kid that ends up as successor trustee is going to have to guide the others about setting up their own accounts, clarifying when the funds can/need to be taken (the SECURE Act makes that complicated) and maybe work with them to figure out how they should invest the funds in their accounts and maybe those they take out. Do you view these activities as something the trustee should hire expertise to do and do you have any ideas as to what kind - lawyer, CPA, financial advisor, etc.?

Thank you for your idea.   :-)))

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Re: THe SECURE Act and Non-Designated Beneficiaries

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You said "Yes, our trust says pretty much the same thing that the trustee can do whatever he/she wants as if the funds are his/her own."  The trusts I have seen says the trustee can do anything with any of the funds to settle the trust but that may be a fine point.  Fees to settle come out prior to figure out the distribution.  

But you bring up a good point with the tax deferred stuff.  One of the heirs may want to take a lump sum and pay the taxes.  The other may want to distribute it over time.  They may need a financial planner to help them make a good decision.  But as I recall, in one trust, the one heir took her tax deferred stuff and rolled into an IRA.  She then had to comply with the applicable rules.  And her financial planner at Fidelity gave her advice.  They knew it was an inherited IRA and helped her decide.  They told her about the rules.

I would just tell you kids when they get the money, they will have to handle it.  You can't live their lives for them anymore.  

I would recommend an estate attorney if you have multiple kids/heirs.  They will make sure all the i's are dotted and t's crossed.  I recall their were timeframes on signing off of what the trustee was going to do. It was accelerated, i.e, you get your money sooner, if you signed off.  And I would recommend each put the money somewhere so they can get advice.  But it will be up to each to do as they please.  Just tell them about it now.

Relax a bit.  You are doing a good job with the trust.  Maybe the person who created your trust is the appropriate estate attorney? 

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Re: The SECURE Act and Non-Designated Beneficiaries

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@judger wrote:

I don't know if this is the right place to ask, but I am struggling with how to insure accessible funds for the successor trustee for a revocable living trust for final expenses, taxes, trustee fee, unnamed charitable gifts, etc. Most of our assets are tied up in IRA's, Roth's and other assets governed by beneficiary law.

Scenario: Husband and wife are owners and co-trustees of a revocable living trust. Husband has a Roth at a brokerage firm with the wife as primary beneficiary and the living trust as contingent beneficiary. He passes first. The wife either leaves his Roth as inherited from him (probably not good due to 10 year distribution requirement, right?) or she transfers it to herself and maintains the living trust as the primary beneficiary. I realize that the living trust is a Non-Designated Beneficiary and must be distributed within 5 years.

Wife passes. Can the "final" successor trustee, a child say, use these Roth funds by transferring some or all of them to a taxable checking account, say, to pay final expenses, gifts to unnamed charities, taxes, trustee fee, etc. and then finally distribute any remaining funds to the ultimate trust beneficiaries, the children in this scenario?

I would appreciate your thoughts, comments, suggestions. However, any drastic moves away from the described account types would not IMHO be a feasible move.

Thank you.   :-)))


Short answer

you need to discuss this question with the lawyer who drafted the living trust. No one else can give a correct answer.

 

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Re: The SECURE Act and Non-Designated Beneficiaries

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Intruder and I are in agreement.  Talk to the person who drew up the trust.  And like I said, maybe they can help your trustee settle it if they are still in business when the time comes.  I hope that will be in the distant future.

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Re: The SECURE Act and Non-Designated Beneficiaries

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"Short answer

you need to discuss this question with the lawyer who drafted the living trust. No one else can give a correct answer."

Amen, Intruder.

Bob

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Re: The SECURE Act and Non-Designated Beneficiaries

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Thank you both for the lawyer suggestion. Unfortunately, the trust lawyer turned out to be quite deficient in beneficiary law. I had to rely on a national TIAA lawyer that has been very kind in assisting me or at least guiding me on where to get answers. Maybe the my trust lawyer's younger generation will prove more knowledgeable.

The TIAA lawyer also very recently was quite involved in both predicting the SECURE Act and working with a local CPA on how to fund named charities using an IRA. Both agreed: DO NOT CASH THE IRA. GIVE IT TO CHARITIES TO SAVE TAXES.

 

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Re: The SECURE Act and Non-Designated Beneficiaries

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@judger 

I've attended a couple of local conferences on the provisions of SECURE, and so this is how I understand the new rules on beneficiaries.

Generally, a Trust may not be beneficiaries of an IRA. Rather, a trust can be named to receive the RMD's of an individual beneficiary as either a pass-through conduit trust or as an accumulation trust. As long as the beneficiary of the trust is the sole beneficiary and is a person, the rules governing RMDs for Individuals as Eligible Designated Beneficiaries (EDB) or Designated Beneficiaries (DB) under SECURE will apply (death occured after 2019). If the named beneficiary of the trust is not a person (charity, estate, another trust), they are considered non-Designated Beneficiaries (NDB), thus falling under the 5 year rule for full distribution of Roth IRAs and TIRAs if the owner died prior to their Required Beginning Date (RBD) or if death was on or after the RBD, the RMDs must come out at least as fast as the owner would have taken them had they not died.

There has been some debate on this, but I believe the successor beneficiary of a deceased EDB or DB will have their own 10 year period, while NDB successors will simply continue the withdrawal of the beneficiary as though the EBD or BD did not die....at least that's how I understand it.

Yes, generally it is always better for the surviving spouse to rollover the IRA into their own and treat it as their own.

Remember, the RMD is just that...the minimum. Beneficiaries may withdraw as much as they wish as long as it is at least the minimum.

From my experience, its usually best to avoid trusts as beneficiaries if at all possible. Trust can be expensive to set up and maintain, but they are useful with spend-thrifts who would otherwise withdraw all the money from a large TIRA and go blow it, as it will meter how much of the IRA will be distributed to the undisciplined adult beneficiary. For minors, its best to name a custodial account in the name of the minor beneficiary as the beneficiary, as this will allow the parent/guardian to control access to the account...but once the child reaches age of majority will have full access to the IRA balance as well as then be subject to the 10 year rule at that point.

If this is complicated, you might want to see a local CPA who understand the rules well.

BruceM

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Re: The SECURE Act and Non-Designated Beneficiaries

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Bob, thank you for getting involved. See my response to the suggestion.

I unfortunately had to become more knowledgeable than I ever wanted to dig out and propose a correction to our trust years after it was put it place. Even though my review proved that my email communications were quite clear that charitable gifts were to be based on percentages of the ENTIRE ESTATE and not just the TRUST, the lawyer missed that in the trust wording. This estate versus trust requirement was because so much of our estate is under beneficiary law and thus out of the reach of the trust other than for the trust to state the charitable goals.

I've read some legal stuff for my job while purchasing major stuff, but trust wording is not second nature to me and was very painful to comprehend and propose changes for. If you let an amateur design something and what you get may not be pretty.

Take away is NEVER state gifts, etc. in percentages of an estate or use assets largely under beneficiary law to fund them. Very hard to determine the exact requirement and to allow for or to fund the requirement before Ya die! Too late!!!!     :-(((

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Re: The SECURE Act and Non-Designated Beneficiaries

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Bruce, the trust has been done for years and paid for, about $3k after some changes that I thought the lawyer should have eaten due to mistaken wording but would not.

Next point is that I am suggesting using a Roth, not an IRA, with the trust as a non-designated beneficiary with no tax or RMD consequences other than the new SECURE Act distribution time frames plus easy access for the successor trustee.

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Re: The SECURE Act and Non-Designated Beneficiaries

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@judger 

Trusts written before the Secure Act need to be revisited. That's a polite way of saying Estate Planners love such changes and willing to accept your money to resolve newly-created issues.

Here's an informative extract from the National Law Review:

The SECURE Act: Trust Planning for Inherited IRAs

A common estate planning technique for clients with substantial retirement plan assets is to name a trust as the beneficiary of those assets. Trusts holding an inherited IRA, for example, can provide the typical controls and protections that make trusts desirable:  asset protection from creditors, centralized asset management, and ensuring that a beneficiary (such as a child or grandchild) does not receive a substantial and immediate outright gift. The SECURE Act may upend a number of these goals where IRAs are directed to existing trusts.

I previously named a trust for my children as the beneficiary of my retirement accounts. How does the SECURE Act affect my planning? 

Under previous law, a non-spouse beneficiary could take distributions from an inherited IRA over the beneficiary’s life expectancy, resulting in favorable income tax deferral (the “stretch”). Under the SECURE Act, however, the “stretch” for most non-spouse beneficiaries has been reduced to a 10-year term. Put simply, the SECURE Act requires that most retirement assets inherited in 2020 and beyond be distributed at the end of a 10-year period.

Historically, where retirement assets are directed to a trust, the trust beneficiaries could get the benefit of a stretch, provided the trust was properly drafted. For a trust to have qualified for the stretch, the trust must have been drafted as a “see-through” trust. There are two types of see-through trusts: “conduit” trusts and “accumulation” trusts. The greatest impact of the SECURE Act will be on conduit trusts.

Conduit trusts are trusts designed to force out all IRA distributions (RMDs) to the trust beneficiaries. In other words, whenever a distribution is made from the IRA to the trust, the trustee must immediately distribute the IRA proceeds to the trust beneficiary. Under the SECURE Act, these trusts present a new problem: if an IRA has substantial value and must pay out the entire account by the end of a 10-year period, then a beneficiary of a conduit trust will receive a distribution that is much greater than what was intended – specifically, the entire value of the IRA by the end of the 10-year period.

The alternative to conduit trust planning is “accumulation” trust planning. An accumulation trust gives the trustee discretion on whether to pay out or retain RMDs within the trust. For that reason, an accumulation trust can solve the problem of the trust beneficiary receiving an unexpectedly large distribution, along with the risk of creditors accessing those assets. However, depending on the particular drafting of the accumulation trust, it could be less income tax efficient. This is because IRA distributions generate an income tax burden, and income accumulated within a trust often is taxed at the top income tax rate. An accumulation trust could be drafted to give the trustee discretion to distribute RMDs, and that discretion could be used to spread some of the tax burden to the recipients. Accordingly, the current thinking is that most retirement plans payable to a trust should aim to qualify as an accumulation trust, giving trustees discretion to make more tax-efficient distributions.

In short, if you have designated a trust as the beneficiary of your retirement accounts, you should review the drafting of that trust with your estate planning attorney to understand the implications of the SECURE Act.  With careful attention by your estate planning attorney, a trust can be designed to hold an IRA that need not distribute all IRA withdrawals within 10 years and may instead accumulate those withdrawals. Any existing trusts may require modification.

In short, I would not go so far as to say that Trusts should not be named a beneficiary of a tax-deferred account (IRA, 401K) BUT I would say you need to ensure it has the desired effect!!

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Re: The SECURE Act and Non-Designated Beneficiaries

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Va-Tech, as I replied to Bruce, you may have missed that I am proposing using a Roth with the trust as non-designated beneficiary. It has no RMD requirements and withdrawals are tax free.

PS: Using a Roth would allow us to hold back the funds from a taxable account until the successor needs them and then they are tax-free.

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Judger,

In part because of all the recent changes for beneficiaries plus the fact that our longtime estate planning lawyer recently passed away, my lady and I are scheduled to meet with another lawyer in the firm (highly recommended by a retired partner whom we know).

As you know, these are complex matters--the specifics of which I choose not to discuss online.

If you are unhappy with a lawyer, there are a number of published evaluations of specific lawyers and law firms. Try, for example, Best Lawyers and/or Best Lawyers (Trusts and Estates).

Bob

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Re: The SECURE Act and Non-Designated Beneficiaries

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@GLI2019 wrote:

Judger,

In part because of all the recent changes for beneficiaries plus the fact that our longtime estate planning lawyer recently passed away, my lady and I are scheduled to meet with another lawyer in the firm (highly recommended by a retired partner whom we know).

As you know, these are complex matters--the specifics of which I choose not to discuss online.

If you are unhappy with a lawyer, there are a number of published evaluations of specific lawyers and law firms. Try, for example, Best Lawyers and/or Best Lawyers (Trusts and Estates).

Bob


Thank you, Bob. I may have to do that.

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Re: The SECURE Act and Non-Designated Beneficiaries

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Judger,

I know you are not in Little Rock, but here's an example of a quick search in your state:

https://www.bestlawyers.com/united-states/arkansas/little-rock/trusts-and-estates

Looks like one firm, in particular, has significant representation.

Bob

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Re: The SECURE Act and Non-Designated Beneficiaries

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THANK YOU, BOB! I have bookmarked that firm.  :-)))

True, not in Little Rock, but a good place to start or even travel to  if the circumstances dictate the need.

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Re: The SECURE Act and Non-Designated Beneficiaries

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Hope it proves helpful, Judger. That's what we are all about.

Bob

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