Seeking Financial Wisdom

[Rianne]

I've been reading posts here for a while and decided to take the leap. There seems to be a broad range of wisdom and I have a few questions.

I'll start by saying we're comfortably RE and DH has a small consulting gig at home. Many years ago we listened to Bob Brinker. He turned us on to Vanguard and DIY investing. That was back in the early 90s and here we are. Great advice from a radio show! How to avoid the shark attack, stick to a plan, and LBYM. Hey, it works.

We're at the point where we want to make sure we leave our beneficiaries in a good spot. We have a Living Trust but don't know the best/easiest way to leave the tIRA and Roth funds. Use the beneficiary form or put the trust as the beneficiary. The Roths have our beneficiaries divided up into %s to each person. I understand each person creates an individual beneficiary IRA upon our death. Does anyone understand that procedure? We simply want to avoid any hassles. I know the tIRA beneficiaries have 10 years to figure out what to do with that fund, but what about the beneficiary form direct from Vanguard. Is that easier to distribute?

Hope I'm making sense!

 

[friar1610]

I am no expert on this, BUT… A podcast I listen to regularly (The Retirement and IRA Show) has made the point many times that IRAs (Roth or otherwise) should not be placed in trusts unless there are very specific reasons for doing so (like wanting to retain control). Apparently, earnings in trusts are taxed at the very highest tax rates which would likely not be the case if the IRAs were simply left to beneficiaries.

This is not an issue in my case, so it’s not something I paid great attention to during the podcasts. So if this is of potential concern to you, get the advice of someone more knowledgeable than I.

 

[OldShooter]

It can be tricky, so at some point you should get expert help. I'll use us as an example: One grand is getting a special needs trust. It will be funded from the Roths because then the trustee can keep the trust going beyond 10 years without the money being taxed at the high trust rate. DS and a couple of other grands are getting tIRA money, so as a practical matter those trusts will be liquidated at the ten year point.

Our instructions divide up the estate based on percentages with a certain amount going to charity. The charities will get tIRA money and will never pay tax on it, so those dollars are worth more to them than they would be to DS and the grands. Thus, our instructions to the executor are that the percentage division should consider the lesser value of the tIRA money going to DS and the grands. It's a little complicated, but we and our attorney put a lot of thought into it and we think we have it right.

In your case, it sounds like you will not have testamentary trusts after your estate is liquidated. Your rev trust money will end up getting distributed to your beneficiaries immediately. Your attorney can help with the funds flows and the language. If your beneficiaries are each getting an equal percentage you probably want to extend that to be an equal percentage of the Roths and an equal percentage of the tIRAs, leaving them in identical tax situations.

Be sure the plan considers unhappy cases like both of you dying in a common disaster and a beneficiary or beneficiaries dying before you do. Your attorney will help you choose among the contingencies.

 

[OldShooter]

... Apparently, earnings in trusts are taxed at the very highest tax rates which would likely not be the case if the IRAs were simply left to beneficiaries. ...

Yes, but funds are only taxed at the trust rate if they are not distributed to the beneficiaries. So as a practical matter, everything coming out of a tIRA held by a trust must be distributed in the year received. A consequence of this is that a trust holding only tIRAs will probably be terminated by the 10 year point.

IANAL, though. Expert help is needed with this stuff.

 

[Dtail]

Yes, but funds are only taxed at the trust rate if they are not distributed to the beneficiaries. So as a practical matter, everything coming out of a tIRA held by a trust must be distributed in the year received. A consequence of this is that a trust holding only tIRAs will probably be terminated by the 10 year point.

IANAL, though. Expert help is needed with this stuff.

Further complicated with Simple Trusts vs. Complex Trusts, as typically with Simple trusts, all income is considered distributed whether it is or not, while with Complex Trusts, it is non trust income only if distributed.

 

[Montecfo]

The most straightforward approach is to use the designation of beneficiary process with your IRAs. It is very easy to do or to change and keeps those funds out of the traffic of the rest of your estate.

Upon your passing, beneficiaries set up an inherited IRA, typically with the same custodian where you hold your IRA. They can use that inherited IRA where it sits or can then transfer it to an inherited IRA account with their favorite brokerage or other custodian and take distributions in accord with their wishes and IRS rules. It is a fairly simple process.

As stated earlier in the thread, it is usually unwise to designate your estate or a trust as beneficiary of an IRA without very good reasons. It just complicates matters and substitutes a more opaque process which will involve attorneys for a relatively simple one that does not.

Best of luck.

 

[Katiek]

I agree that the simplest approach is to just name the beneficiaries with the organization holding the IRAs. If your accounts are held at Vanguard or one of the other places where your beneficiaries would want to keep the IRAs, it's very easy to establish new accounts in the right percentages. We've done this with Vanguard, and they were very helpful in making sure the accounts were named correctly.


We've also had situations where the money was held in a union pension fund, but Vanguard was able to set up individual inherited IRAs as well. It took more effort because they had to coordinate the transfer of the funds with a third party, but it was still relatively easy to do.


So unless there is any special need for a trust, my experience has been that just naming the designated beneficiaries and their respective percentages is the easiest way to approach this.