In the first part we reviewed the requirements for a trust to qualify as see-through, and the distributions options. In this final part we cover questions about “ghost” life expectancy, and taxation or distributions.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the distribution options for most IRA beneficiaries. In the first part of this two-part series, we reviewed the requirements for a trust to qualify as see-through, and the available distributions options. Now in this second and final part, we will cover questions about “ghost” life expectancy, as well as the taxation or distributions.
What is a “ghost life-expectancy” distribution option, and how does a trust get one?
When a traditional IRA account owner dies after their required beginning date (RBD), a trust that does not meet the see-through trust rules has the option of continuing the deceased owner’s remaining life expectancy.
How are the distributions from an IRA left to a trust taxed?
It depends. First, let’s assume the only asset the trust has is the IRA distribution. The IRA distribution is paid to the trust and is considered income to the trust. If the trust distributes the income to a beneficiary, the income is included in the beneficiary’s income and taxed at his/her rate. If the trust can accumulate income, then any income that remains in the trust is taxed at the trust tax rates. Assuming they are qualified, Roth IRA distributions are tax-free.
The trust tax rates have compressed tax brackets. This means income retained by the trust in excess of $15,200 will be taxed at the maximum rate of 37%. Assuming they are qualified, Roth IRA distributions are tax-free, except to the extent interest is credited from the cash account in the trust.
Estates and Trusts
| Minimum | Maximum | Tax on Minimum | Rate on Excess |
|---|---|---|---|
| $0 | $3,100 | $0 | 10% |
| 3,101 | 11,150 | 310 | 24% |
| 11,151 | 15,200 | 2,242 | 35% |
| 15,201 | - | 3,660 | 37% |
Source: 2024 Federal Tax Amounts and Limits. National Underwriter Co.
What else am I missing?
As this Q & A explains, it is complex when the beneficiary of an IRA is a trust. If a special-needs child, someone compromised by addiction or with creditor problems, or a similar issue is involved, a trust most likely makes sense. It will protect the beneficiary in many other cases; the only concern is that the beneficiary will not have immediate access to all the funds. Other options, such as predetermined beneficiary payout option may allow for a distribution over time and be easier to manage. As this is a complicated area, always remember to consult your tax and legal professionals before making any decisions.
ACTIONS YOU CAN TAKE RIGHT NOW
- Identify clients who plan to retire within three to five years.
- Evaluate how potential tax burdens might affect Social Security claiming decisions.
- Meet with each client to determine and manage taxes in their retirement-income strategy.
For more information about retirement-planning, please contact our Retirement Strategies Group at RSG@PacificLife.com or (800) 722-2333, ext. 3939. PacificLife.com
This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.
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Pacific Life refers to Pacific Life Insurance Company and its subsidiary Pacific Life & Annuity Company. Insurance products can be issued in all states, except New York, by Pacific Life Insurance Company and in all states by Pacific Life & Annuity Company. Product/material availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company and an affiliate of Pacific Life & Annuity Company.
The home office for Pacific Life & Annuity Company is located in Phoenix, Arizona. The home office for Pacific Life Insurance Company is located in Omaha, Nebraska.
No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency
For financial professional use only. Not for use with the public.