Traditional IRA going to Trust upon death - Questions about minimums and fees

[oldphd]

Happy Saturday!

Have been looking into this and not feeling good about my understanding.

Situation - mid 80s couple in good health has $500K traditional IRA, just taking RMDs. Recently changed will to leave to 4 grandkids (age mid 20s-mid30s) in a trust (actually 4 trusts, 1 per grandkid). While I'm executor, I don't have details on the trust provisions, however my father has stated he wants it to go for "their retirement and off limits from lawsuits". He has a vision of them retiring gazillionaires because of compounding. On a related note, I have discussed having him convert some to Roths (he's got room in 22% with no state tax, 3/4 beneficiaries are in at least 22% or higher now and have state tax including CA). He dismissed this without discussion as hogwash and no need to calculate since he "knows it will be more without converting".

Question:

With the IRA in a trust and a management fee is owed, is this fee taken out of the trust, ie before taxation? From what I can find I think this is possible. If so, does it count towards the RMD of the beneficiary?

What sort of minimum assets/fees can be expected?

I've found limited published trust fee/minimums. Off the top of my head, one said $500K assets, one was $200K assets (subject to minimum fees), another said no minimum assets but subject to minimum fees that are based on $1M assets. Another said $6K minimum fee with no minimum assets, along with %. It is currently with TIAA and for all I know might be set up to stay there.

My concern/question is how much comes out each year. I'd like to run a simple spreadsheet with some assumed returns and see what happens, but don't know how to account for the fees. Let's say the RMD for the beneficiary is 2% and the fee must come out on top of that, whether taxed or not. Depending on what % that works out to be due to the relatively small principal, there may not be enough critical mass of principal to sustain this. Could there be no distribution to the beneficiary if the fee was 2% and offset the distribution? I recently read Beyond the Grave, which mentions sufficient assets for trusts, but could never find what sort of figure that might be.

Given their age, I don't expect any growth given the size of their RMDs, though my crystal ball of future returns is hazy.

And before anyone asks... I don't have access to the details or the lawyer or the financial advisor (who lives in a really nice house and invites them over to go out on his boat! Nice guy! ). When I've asked questions in the past about details, I get told it's not my business, he's deciding everything and I'll just execute. I have been told they buy life insurance with RMDs since they don't need the money... financial advisor came up with this plan To be honest, I'm sorely tempted to tell him I pass as executor but this will no doubt add stress to an already strained relationship. I'm also a Fido private client who has a good relationship with my advisor. Last time in I mentioned the scenario and he basically said it wasn't enough money to bother doing the trusts.

Anyone with experience along these lines? Put any numbers on the fees/accounting that might get me closer to a spreadsheet that has some potential for reality instead of a SWAG?

TIA for any enlightenment!

[GrayHare]

An IRA having a trust as beneficiary forces its funds to be withdrawn within 5 years of the decedent's passing. An IRA itself inside a trust might force the same quick withdrawal, but that's an uncommon arrangement and one with which I'm not familiar.

[Brat]

If you search for a thread in which I participated you will find a discussion of regular IRAs and Roth IRAs as an inheritance. The problem for your parents is that they cannot control what happens beyond the grave.

Consider, after taking their MRD, move $ to Roths. Maybe create the same number of accounts as the grandchildren, make each other primary beneficiary and a grandchild as contingent benificary. Tell each grandchild what they want them to do with the money and if they violate their directive they will be haunted by angry spirits.

Unless the law has changed designating a trust or trusts as benificiarys is not the answer.

[pb4uski]

A question... so let's say that a $1 million IRA has a trust is designated as the beneficiary and the owner dies. Since there is no lifetime to be used, the IRA distributions are over 5 years.... $200k a year.... that is income to the trust that they need to either distribute to beneficiaries (and they pay tax on it) or retained by the trust and taxed within the trust until it is distributed to trust beneficiaries. Is that the way it works?

If so, it doesn't sound like a good idea to me.

[kaneohe]

Trusts can be beneficiaries of IRAs w/ stretch provisions if they are done properly. https://www.kitces.com/blog/qualifyi...-accumulation/

[pb4uski]

Quote:

Originally Posted by oldphd ..... When I've asked questions in the past about details, I get told it's not my business, he's deciding everything and I'll just execute. I have been told they buy life insurance with RMDs since they don't need the money... financial advisor came up with this plan To be honest, I'm sorely tempted to tell him I pass as executor but this will no doubt add stress to an already strained relationship. ....

That is exactly what I would tell him.... if you can't trust me with the details of the plan then you shouldn't trust me to be executor... and I not all interested in serving as executor.... hire it out and keep me out of it.

It sounds like a huge hassle with no benefits.

[oldphd]

Quote:

Originally Posted by kaneohe Trusts can be beneficiaries of IRAs w/ stretch provisions if they are done properly. https://www.kitces.com/blog/qualifyi...-accumulation/

While I don't have details, I do know they complained about the hassle and cost to "get it done right" in order to allow the beneficiaries to calculate RMDs on their life expectancy.

[oldphd]

Quote:

Originally Posted by Brat Consider, after taking their MRD, move $ to Roths. Maybe create the same number of accounts as the grandchildren, make each other primary beneficiary and a grandchild as contingent benificary. Tell each grandchild what they want them to do with the money and if they violate their directive they will be haunted by angry spirits.

I have gone through this approach with no progress. They don't get it.

[oldphd]

Small additional info... his parents (my grandparents) left a trust with the idea of skipping a generation. Long story short, between fees and poor returns the ones who benefited the most were the trustees. I spent time documenting a decade of returns and convinced him that the under $500K trust wasn't big enough to overcome the fees, though the poor returns were also a big contributor. Think 1-2% mutual funds underperforming an index fund for 10 years, chosen by 1+% trustee.

After literally years of discussion he finally agreed and got the trust dissolved by denying his right to future money. He also said he'd change his will to not leave the same arrangement. Awesome! So he went from 1 or 2 trusts up to possibly 7 including taxable funds for a barely $1M estate. There have also been 3-4 different wills over the past couple of decades, each incurring fees they've complained about. I think the lawyer is the biggest beneficiary.

[swakyaby]

Quote:

Originally Posted by pb4uski That is exactly what I would tell him.... if you can't trust me with the details of the plan then you shouldn't trust me to be executor... and I not all interested in serving as executor.... hire it out and keep me out of it. It sounds like a huge hassle with no benefits.

What he said +1

[GrayHare]

Quote:

Originally Posted by kaneohe Trusts can be beneficiaries of IRAs w/ stretch provisions if they are done properly. https://www.kitces.com/blog/qualifyi...-accumulation/

Great info there. So a stretch IRA is doable via trust, but one must get all the details right.

[Sue J]

Why does this need to be in a trust? Can't he just designate the 4 grandkids as beneficiaries? Then each one could decide how to withdraw the money from their own inherited IRA, whether it's RMD based on lifetime or in chunks as needed. Each grandkid could invest it how they wanted with the idea that granddad wanted it to be for their own retirement.

As for lawsuits, isn't IRA money already exempt from lawsuits?

[oldphd]

Quote:

Originally Posted by Sue J Why does this need to be in a trust? Can't he just designate the 4 grandkids as beneficiaries? Then each one could decide how to withdraw the money from their own inherited IRA, whether it's RMD based on lifetime or in chunks as needed. Each grandkid could invest it how they wanted with the idea that granddad wanted it to be for their own retirement. As for lawsuits, isn't IRA money already exempt from lawsuits?

Can't say for sure since I haven't seen paperwork, but my guess is he is limiting withdrawals to RMDs, not allowing extra. IMHO/guess that is the purpose of the trust. Since they are all relatively young and married, I'm also guessing he is concerned about a divorce and any of "his" money going to an ex-spouse. Only 2 of the 4 has a child at this time.

IRA money and lawsuits is state dependent, but many/most are exempt. I looked it up once, but couldn't find it now.

There is no question that he wants to control from beyond the grave, so to speak. There are plenty of personality issues that I could go on about, but I'm trying to avoid that in the thread and get to the objective answers. If I could draw up a spreadsheet and show some numbers to back me up I might stand a chance of getting things altered.

[oldphd]

Anyone have any idea on minimum fees for a managed trust?

[Brat]

If you search for a thread in which I participated you will find a discussion of regular IRAs and Roth IRAs as an inheritance. The problem for your parents is that they cannot control what happens beyond the grave

Were I them I would take $ from my regular IRA after taking their MRD and stash it in Roths. Maybe create the same number of accounts as the grandchildren, make each other primary beneficiary and a grandchild as contingent benificary. Tell each grandchild what they want them to do with the money and if they violate their directive they will be haunted by their angry spirits.

[oldphd]

Quote:

Originally Posted by Brat If you search for a thread in which I participated you will find a discussion of regular IRAs and Roth IRAs as an inheritance. The problem for your parents is that they cannot control what happens beyond the grave Tell each grandchild what they want them to do with the money and if they violate their directive they will be haunted by their angry spirits.

Brat, you've participated in a couple of threads over the years, and my search skills aren't good enough to narrow it down to where I can find it. Any other guidance on search, perhaps a date or ?!?

I like the haunting idea, but will have to consider whether to pass it along. Not much of a sense of humor on his part...

The really sad thing is that any of the beneficiaries who would do the "right" thing, ie what grandpa wants, will be saddled by the fees and the benefit limited.

[Brat]

Here is an exerpt from my letter to my kids re inherited IRAs, Joe is only son Kirsten is only daughter, $ values not current:

When one of us passes merge both our Roth and Traditional IRAs unless it appears that our estate may exceed $1 million (the current Oregon Estate Tax level) at the last the last to die. In that situation consult an attorney with expertise in Oregon Estate tax. Each of you are equal beneficiaries on these accounts. Currently our IRA accounts are at Vanguard. To accomplish the following I recommend moving accounts to Fidelity because they have local representatives and you will not need to deal with unknown customer service reps by phone.

Now on to consideration of estate management issues. The survivor (Don or I) should consider splitting each IRA into separate accounts and naming each of you beneficiaries. For example:
Traditional IRA 1 - Beneficiary Joe naming Trinity & Tristan as contingent beneficiaries;
Traditional IRA 2 - Beneficiary Kirsten naming Scott and Gwen as contingent beneficiaries;
Roth IRA 1 - Beneficiary Joe naming Trinity & Tristan as contingent beneficiaries
Roth IRA 2 - Beneficiary Kirsten naming Scott and Gwen as contingent beneficiaries;

This may seem nuts but what it enables is that when the last of us passes you can decide to renounce all or part of your inheritance for the benefit of your children, you can only renounce to a named beneficiary. Money withdrawn from a traditional IRA is taxable, your children’s marginal tax rate (assuming they are not still dependents on your tax return) will be lower than yours. Also an inherited IRA is not sheltered in case of bankruptcy or litigation. I recommend depleting each inherited IRA using the annuity methodology based on the inheritor’s age commencing within the first year after our passing. If you have renounced the an IRA for the benefit of your children the account can to grow tax free longer.

There may come a time that you wish your interest in our IRA accounts to go directly to your children. That can be done.

Our Roth IRAs are invested in Berkshire Hathaway stock, their combined value is approx $220,000. I do not anticipate using this money.

Our Traditional IRAs need to be conservatively invested because we depend on that income for expenses. They are both invested in the Wellington mutual fund which is a balanced fund with a 70% stock/30% bond allocation. We are both taking required minimum distributions. Their current combined value is about $660,000 with an average minimum required distribution of 5%. Because of the lower marginal tax rate in the next few years we plan to convert some Traditional IRA money to a Roth.

FWIW, telling heirs that you may haunt them doesn't trouble me. They can always renounce their inheritance....

[oldphd]

Thanks Brat!