Inherited IRA Purchasing an Annuity

[Woodman53]

l am working on our estate planning, and I have determined based on our circumstances that when my wife and I pass our assets will go to an irrevocable trust. The trust will purchase a "Life with 10 Year Certainty" annuity for our children (SIPA). The children will be the beneficiary of the SPIA. Each child will have their own SPIA(s). We will purchase multiple annuities for each child to ensure they are under the state insured level.

The trust will be using an inherited traditional and/or a Roth IRA to purchase the annuity.

My understanding if the trust uses an inherited traditional IRA to fund the annuity the dollars used for the purchase will be considered a distribution and will be fully taxable. And if the traditional IRA is transferred to an irrevocable trust at death, it will be taxed at the trust rate when distributed (annuity purchased).

Can you please comment on this and let me know if this is correct.

If I am correct, then it appears that we should convert tIRA to a Roth IRA during our lifetime. The amount to be converted each year depending on income, tax rates, IRMAA, etc.

This would eliminate the need to pay taxes at the trust rate.

Appreciate any input.

 

[Flyfish1]

My understanding if the trust uses an inherited traditional IRA to fund the annuity the dollars used for the purchase will be considered a distribution and will be fully taxable. And if the traditional IRA is transferred to an irrevocable trust at death, it will be taxed at the trust rate when distributed (annuity purchased).

That is my understanding as well, but we need the smarter people here to weigh in.

 

[dickoncapecod]

l am working on our estate planning, and I have determined based on our circumstances that when my wife and I pass our assets will go to an irrevocable trust. The trust will purchase a "Life with 10 Year Certainty" annuity for our children (SIPA). The children will be the beneficiary of the SPIA. Each child will have their own SPIA(s). We will purchase multiple annuities for each child to ensure they are under the state insured level.

The trust will be using an inherited traditional and/or a Roth IRA to purchase the annuity.

My understanding if the trust uses an inherited traditional IRA to fund the annuity the dollars used for the purchase will be considered a distribution and will be fully taxable. And if the traditional IRA is transferred to an irrevocable trust at death, it will be taxed at the trust rate when distributed (annuity purchased).

Can you please comment on this and let me know if this is correct.

If I am correct, then it appears that we should convert tIRA to a Roth IRA during our lifetime. The amount to be converted each year depending on income, tax rates, IRMAA, etc.

This would eliminate the need to pay taxes at the trust rate.

Appreciate any input.

PLEASE ask an elderlaw or tax specialist. Don't risk what may be destructive and irrevocable structure and/or tax decisions on (even well-meaning) internet advice.
Regards, Dick

 

[OldShooter]

PLEASE ask an elderlaw or tax specialist. Don't risk what may be destructive and irrevocable structure and/or tax decisions on (even well-meaning) internet advice.
Regards, Dick

This. Performing your own appendectomy is not recommended.

Remember, there are no do-overs possible here. When problems are discovered you are already dead. Worst case, your estate or trusts will end up in court with one or more beneficiaries or with one or more insurance companies.

Remember, too, that this is not one-and-done. Your plan will have to be updated as tax laws change and beneficiary issues arise. (Death of a beneficiary, for example.)

 

[RetiredHappy]

I assume that you are referring to IRA funds. At first glance the issue is that if the estate is not immediately paying taxes on the full amount of distribution on passing, the irrevocable trust cannot buy a SPIA because it is subjected to the 10-year inherited IRA rule. The trust can buy a 10-year annuity but not a distribution for life.