Splitting Roth IRAs, Naming Trusts as Beneficiaries Highlight Mailbag

Falls is upon us, it is the last week of summer vacations (unofficially of course!) and consumers are starting to focus on their financial situation with year-end fast approaching. This week's Slott Report Mailbag features questions on splitting Roth IRAs for beneficiaries, using Net Unrealized Appreciation (NUA), and naming trusts as IRA beneficiaries.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find out at this link.

1.

Ed and Company,

I retired nine years ago.  Two years ago, I began making annual cash direct transfers from my 401(k) to an IRA, and then moved the IRA funds to a Roth IRA.  My 401(k) contains company stock in an ESOP and a TRASOP.  Can I now terminate the 401(k), move all of the assets except the company stock to an IRA, and distribute the company stock to myself, paying income tax only on my original cost, and paying capital gains tax later, when the stock is sold, even though I have taken some cash from the 401(k) in prior years?

Thanks,
John

Answer:
You can terminate your 401(k) plan anytime you would like.  To use NUA, however, the distribution, assuming you have appreciated employer securities, must occur after one of these triggering events.

1. Death
2. Reaching Age 59 1/2 (plan must allow distributions)
3. Separation from service

If any of these events, other than number #1, did not occur after your annual cash transfers you will NOT qualify for NUA treatment.  If you do qualify, the entire NUA transaction must take place within one calendar year.  The employer stock must be taken out in-kind and all the other assets distributed to your or to an IRA.

2.

We recently watched Ed Slott's show on the local PBS station, KERA-TV, and read a Detroit Free press article in the Dallas Morning News in which he was quoted.  Per your advice, we are in the process of reviewing all of our beneficiary documents and plan to revise our wills to reflect any changes made.  However, we feel our situation is relatively unique and have a question.

We are a family of four (father, mother and two adult sons and an adult married daughter).  Our oldest son lives with us, as does our middle son who is also Special Needs with Down Syndrome.  My wife and I are named Legal Guardians for our son, and a Line of Successive Guardians is established.

Our wills each list the other son as primary beneficiary, with our daughter and oldest son each with 33 1/3 shares as contingent beneficiaries.  The remaining 33.3 share is to be given to a Special Needs Trust for the benefit of our middle son.

I want to be sure I understand your remarks concerning beneficiary documents for our financial accounts.  Please correct me if I'm wrong, but I believe I understand that for any of my financial accounts, the primary beneficiary statement should read, "Harold A. Teagarden (me), IRA deceased, date of death for the 100% benefit of Niki S. Teagarden (my spouse) as beneficiary."

Contingent beneficiary statements would read basically the same except each of my children's (except for my middle son) names would be substituted for my wife's name as well as the appropriate share percentage that I desire.

Our question is, if we list a Special Needs Trust for the benefit of my middle son as a contingent beneficiary for the remaining 33 1/3 share, will there be adverse tax implications to that share?  I ask because the newspaper article stated that "...it's generally more advantageous to name people rather than estates or trusts..."

Answer:
We are glad you enjoyed Ed Slott's PBS show.  The language you indicated is not used on your beneficiary form.  It is used to title the inherited account after your death.  The portion of your IRA going directly to your wife as primary beneficiary and your children as contingent beneficiaries should simply have your wife listed as primary beneficiary and your children listed by name in the percentages you elect as contingent beneficiaries.

For the 33 1/3 share to be left to your middle son in a Special Needs Trust, it should read the name of the trust as beneficiary.  At your death, the assets in that portion of the IRA should then be segregated into an inherited IRA.  The title of that inherited IRA should read: "Harold A. Teagarden deceases, date of death, for the benefit of the (name of the trust)."

At your death, the assets should not be transferred to the trust.  That would be considered a taxable event.  If the trust meets certain other requirements, the annual Required Minimum Distributions from the IRA, based on the continuing life expectancy of the oldest beneficiary of the trust, can go into the trust.  It must, however, be done correctly.  The garden variety trust document should NOT be used.  You need to ensure that whoever is establishing the trust has expert knowledge in this area.

3.

My wife and I each have Roth IRA accounts.  The beneficiaries of both accounts are our seven grandchildren to be divided equally among them.  Will this arrangement stand up or must we each divide our Roth IRAs into seven separate Roth IRAs?

Answer:
If the designation of beneficiary form is filled out correctly with your seven grandchildren listed by name as primary beneficiaries and the percentages to each, that should suffice.  Of course, it is always best to confirm this with your financial institution. At your death, the IRA can then be separated into shares in an inherited IRA for each grandchild.  You can, however, establish separate accounts during your lifetime and name each grandchild as beneficiary of their share.  It is not necessary, however, to do that unless you would like to invest the money differently in their shares.  You should also make sure that the IRA custodian will recognize the different beneficiaries on each share.

-By Marvin Rotenberg and Jared Trexler

Posted in: IRAs,Mailbag,marvin rotenberg