The simple answer is yes, in most cases a trustee can transfer an inherited IRA out of the trust to the trust beneficiary or beneficiaries without any negative tax consequences. Of course (surprise!)
However, a trust also can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual. When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA then is maintained as a separate account that is an asset of the trust.
Disadvantages of a Trust Beneficiary
Trusts, similar to other non-individuals that inherit IRA assets, are subject to accelerated withdrawal requirements, most often within five years from the original IRA owner's death.
With the inherited IRA retitled accordingly (treating it as “your own”), the surviving spouse is able to make a trustee-to-trustee transfer by moving a current IRA from one investment platform to another.
IRA distributions are considered taxable income and as such are taxed to the trust. The maximum tax rate for trusts is 39.6% and is reached with only $12,400 in taxable income. However, if the trust distributes any portion of its income, that income is taxed directly to the beneficiary of the trust.
If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes. For estates subject to the estate tax, inheritors of an IRA will get an income-tax deduction for the estate taxes paid on the account.
Retirement accounts definitely do not belong in your revocable trust – for example your IRA, Roth IRA, 401K, 403b, 457 and the like. Placing any of these assets in your trust would mean that you are taking them out of your name to retitle them in the name of your trust. The tax ramifications can be disastrous.
If you want to move your individual retirement account (IRA) balance from one provider to another, simply call the current provider and request a “trustee-to-trustee” transfer. This moves money directly from one financial institution to another, and it won't trigger taxes.
You have the option of transferring the IRA or 401(k) assets you inherit from your spouse to an Inherited IRA. With an Inherited IRA, the amount of your required minimum distributions (RMDs) will be based on your age and will be recalculated each year based on the factors in the IRS Single Life Expectancy Table.
Spouses have 60 days from receiving the inherited distribution to roll it over into their own IRA as long as the distribution is not a required minimum distribution. By combining the funds, the spouse doesn't need to take a required minimum distribution until they reach the age of 72.
An irrevocable trust can be used either during the IRA owner's lifetime or upon his death; however, tax considerations typically favor using a revocable trust during owner's lifetime, which becomes irrevocable upon the owner's death.
Trusts with Charitable Beneficiaries
Therefore, any trust which has a charity as a potential beneficiary will be required to take all distributions from the IRA within five years of the participant's death.
An inherited IRA is one that is handed over to someone upon your death. The beneficiary must then take over the account. Generally, the beneficiary of an IRA is the deceased person's spouse, but this isn't always the case.
A Qualifying Trust is one where the IRA can look through the trust to the trust's designated beneficiaries to determine the oldest beneficiary of the IRA. The oldest designated beneficiary's life expectancy is then used to determine the required minimum distribution amount starting the year after the IRA owner's death.
The primary disadvantage of naming a trust as beneficiary is that the retirement plan's assets will be subjected to required minimum distribution payouts, which are calculated based on the life expectancy of the oldest beneficiary.
You can contribute funds directly to your child's or grandchild's IRA. However, it must not exceed the $6,000 ($7,000 for ages 50 and older) limit per year or the child's earned income, whichever is lower. The funds deposited in the IRA do not need to be the child's own funds.
Whenever an IRA owner dies before the account is fully depleted, the IRA will pass to whoever the owner named as beneficiary of the account. And unless that beneficiary was the original IRA owner's spouse, the IRA will become an Inherited IRA.
If you die with your estate as the beneficiary of your IRA or retirement plan, the funds will have to pass through probate before being distributed to the heirs of your estate. Probate is the court-supervised process of administering an estate and also possibly proving a will to be valid.
If you already have an IRA, you can roll over the inherited assets to another traditional IRA in your name or convert the assets to a Roth IRA. The simplest way to do that is through a direct, trustee-to-trustee transfer from one account to the other or between one IRA custodian and another.
Trustee-to-trustee transfers are not required to be reported on Form 1099-R.
A trustee-to-trustee transfer—or a direct transfer—is when the distribution is not paid directly to the account holder, nor does the account holder receive a check made payable to the new account.
There are a variety of assets that you cannot or should not place in a living trust. These include: Retirement Accounts: Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust. Doing so would require a withdrawal and likely trigger income tax.
The first option you can choose when transferring the property title is to gift it to the trustee. The trustee and the trust will have to sign a “gift deed”, which establishes that the ownership of the property is being transferred without payment.
Some of your financial assets need to be owned by your trust and others need to name your trust as the beneficiary. With your day-to-day checking and savings accounts, I always recommend that you own those accounts in the name of your trust.