extract from forthcoming update to practitioner’s guide to ira distribution rules
by seymour goldberg, cpa, mba, jd
the practitioner’s guide to the ira distribution rules under the secure act
editor’s note: as sy goldberg prepares an update to his “practitioner’s guide to the ira distribution rules under the secure act,” he’s uncovering some important nuggets, such as this extract to be found in a section called advantages of trusts as ira beneficiary. this extract, and much more, will be included in the forthcoming update, which is free to purchasers of the current edition.
the use of a protective trust as an ira beneficiary with special provisions when clients have insufficient probate assets and significant ira assets and the estate tax liability is significant.
this means that there may not be a source for payment of estate taxes that are attributable to the ira assets if the beneficiary or beneficiaries of the ira assets do not voluntarily cooperate in reimbursing the personal representative of the estate for the estate taxes attributable to the ira accounts.
this protective trust can be, for example, a short-term trust for, say, 5 years after the date of death of the ira owner, in order to make sure that the allocable estate taxes are paid by the trustee to the personal representative of the estate.
this approach is a must if we have insufficient probate assets to pay for the allocable share of estate taxes attributable to the ira assets. it helps protect the personal representative of the estate from headaches with the irs and/or the state, where applicable, if payments of estate tax liabilities are not made timely or there are insufficient probate assets to satisfy the estate tax liabilities.
need special provisions in the trust regarding the circumstances when payments of estate taxes attributable to ira assets are to be paid by the trustee to personal representative of estate for the estate taxes attributable to ira assets. also, need special provisions in the trust that provide that all fiduciary income taxes that are triggered as a result of payment of said estate taxes to the personal representative of the estate are to be paid by the trustee as well.
we had a case where a beneficiary of significant retirement funds refused to voluntarily pay allocable share of the estate tax liability to the personal representative of the estate. costly litigation was triggered. ultimate recovery was about $200,000.
litigation was commenced before beneficiary received funds. if the beneficiary received funds before blocked in litigation, then forget recovery because beneficiary of retirement funds lived in foreign country.
even if beneficiary lived in u.s. and received retirement funds and spent it or funds disappeared, then what?
also, if, say one beneficiary voluntarily pays his/her share of estate taxes and the other beneficiary does not pay his/her share of estate taxes, then irs and/or the state where applicable can go after the good beneficiary to the extent that the good beneficiary received ira funds after subtracting the funds already received from the good beneficiary.
remember that good beneficiary must pay income taxes on funds he/she withdraws from ira to pay the estate tax liability.
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