As I explained earlier, one option is to leave your Roth IRA to a conduit trust, with your son and grandson as the trust beneficiaries. Another option is to leave the Roth to an accumulation trust for your heirs.
The main attraction of a conduit trust is that it can take required IRA distributions over the course of its human beneficiary's life expectancy. The accumulation trust can't do that. It would have to empty the Roth IRA within five years of your death.
But this doesn't present the same problem it would with a traditional IRA because Roth IRA distributions aren't taxable. They can go into the trust without triggering any taxes.
Let's put some nice big numbers on this and imagine that the Roth IRA distributes $1 million to the trust.
There are no income taxes on that $1 million no matter how long it stays in the trust, since Roth IRA distributions aren't taxable, says Barry C. Picker, a Brooklyn NY tax accountant. But any investment income the $1 million earns inside the trust is taxable. To avoid paying a tax at trust rates, you want this income to be promptly distributed to a human being.
Let's say the trust invests the $1 million at 6%, earning $60,000 a year. If the trust document calls for the annual distribution of trust income to the trust beneficiary, that $60,000 will be paid to your son and taxable to him.
The trust can provide lifetime income for your son. You can name your grandson as the remainder beneficiary, which means he will inherit the $1 million of trust principal.
Your grandson won't owe income taxes on the trust principal. But depending on the amount of money involved, his inheritance might be subject to a generation skipping transfer tax. That's something you should discuss with your tax accountant and the estate lawyer who sets up the trust for you.
(Most people can forget about the generation skipping transfer tax. It comes into play only when a very big chunk of money has been passed from a grandparent to a grandchild without becoming subject to estate tax at the parent's death. This year, it's levied on assets in excess of $3.5 million.)
The main attraction of a conduit trust is that it can take required IRA distributions over the course of its human beneficiary's life expectancy. The accumulation trust can't do that. It would have to empty the Roth IRA within five years of your death.
But this doesn't present the same problem it would with a traditional IRA because Roth IRA distributions aren't taxable. They can go into the trust without triggering any taxes.
Let's put some nice big numbers on this and imagine that the Roth IRA distributes $1 million to the trust.
There are no income taxes on that $1 million no matter how long it stays in the trust, since Roth IRA distributions aren't taxable, says Barry C. Picker, a Brooklyn NY tax accountant. But any investment income the $1 million earns inside the trust is taxable. To avoid paying a tax at trust rates, you want this income to be promptly distributed to a human being.
Let's say the trust invests the $1 million at 6%, earning $60,000 a year. If the trust document calls for the annual distribution of trust income to the trust beneficiary, that $60,000 will be paid to your son and taxable to him.
The trust can provide lifetime income for your son. You can name your grandson as the remainder beneficiary, which means he will inherit the $1 million of trust principal.
Your grandson won't owe income taxes on the trust principal. But depending on the amount of money involved, his inheritance might be subject to a generation skipping transfer tax. That's something you should discuss with your tax accountant and the estate lawyer who sets up the trust for you.
(Most people can forget about the generation skipping transfer tax. It comes into play only when a very big chunk of money has been passed from a grandparent to a grandchild without becoming subject to estate tax at the parent's death. This year, it's levied on assets in excess of $3.5 million.)
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c) Lynn Brenner, All Rights Reserved
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