Mom is in hospice; need advice on her trust

Financial Planning Tax Strategies
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So I’m the named person on 1poormom’s trust. She doesn’t look like she’s going to last much longer (stroke last week). Though she did eat a bit the past two nights (first time in over a week!!), so that’s good.

But it got me wondering. She has to take RMDs. Whenever she passes, I don’t have to take them (I’m not over 70). How is that handled? Does her trust still have to take the RMDs? Is it better (or even possible) to merge her trust with ours (or liquidate her trust assets and deposit them in ours, which I assume could generate a large tax bill)?

It may seem a bit callous, but she wouldn’t want me to be caught flat-footed over her finances. I have been content to manage them for her, make sure her bills are paid, her needs are met. The stroke was unexpected, so now I’m wondering what I need to do when she no longer has any bills.

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Sorry that you are going through that.

Actually, since she is taking RMDs, and you are not her spouse, you will have to take RMDs, too. Additionally, you will have to fully distribute the IRA by 10 years after her death.

AJ

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Is the trust the beneficiary of the IRA or are you the beneficiary? In many cases, having a trust be the beneficiary results in more taxes being paid than if the beneficiary is one or more individuals. That’s because the trust must pay taxes at the trust tax rates, as well as getting no standard deduction. Additionally, trusts must fully disburse an IRA within 5 years, rather than 10 years that individuals are allowed, which means the average income distribution per year is higher. If her trust is the beneficiary of the IRA, then the trust must also take RMDs, just like you would have had to take RMDs if you were the beneficiary.

That’s a question for the attorney who set up her trust, since the answer depends on the rules for the trust. That said, assets in a trust generally still get the same step up in basis that they would get even if they weren’t held in the trust, so liquidating her trust shortly after her death probably won’t generate a significant tax bill, since the basis is likely to be very close to the price that the assets are liquidated at. Whether it will be possible to do a liquidation at that time would, of course, depend on the terms of the trust.

AJ

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Let me add on a bit (and with the knowledge that your mom has now passed).

You won’t actually merge her trust with yours. You will administer her trust as spelled out in the trust, then distribute her assets per the trust. Once all of her trust assets have been distributed, the trust ends.

Assuming you will receive some assets from the trust, it is up to you to decide what to do with those - keep them out of your trust or put them into your trust. My default would be to put them in your trust, but there might be reasons not to do that. In either case, all of her assets would get a step up in value to the current FMV, so there would be no income taxes due.

And assuming her total assets are less than about $12 million, there would be no federal estate taxes due, either. Some states still collect estate taxes, so that’s something to check in to. If you mention the state she lived in, I’m sure someone can figure out if that state has an estate tax.

aj already handled the IRA issues, so there’s nothing for me to do except say that I agree with her.

–Peter

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Her brokerage is in the trust name. I’m now the “head” of the trust, pending the filing of death certificates and such. Her retirement accounts are not in the trust, but name me as beneficiary. Apparently I get a financial adviser in the deal, because he’s going to meet with me (pending death certificates) to handle “transfers”. Mom bought into “PlanMember”. I’ve met him, and he’s a nice guy. Mom liked him. I don’t like the annuities, but oh-well. She has them, and I have to deal with them. They are via him, so it’s fair game to discuss those when we meet.

He says the RMDs will stop temporarily, but then we still have to be sure we meet the 10 yr requirement for liquidation (so RMDs will resume once transfers have been accomplished, I assume).

Estate is not even worth $1M. Far less. But it was enough to put her into a nice place during her fading years. I kinda wish she had spent more of it on herself while she could, instead of leaving me assets that I really don’t need.

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A quick add on for the IRA accounts.

Since you are named as the beneficiary (and not the trust - which is as it should be the vast majority of the time), you probably want to spread out the distributions from her IRA as much as possible. That means leaving the assets in an IRA.

Mechanically, the financial adviser will probably sent up a new IRA account, titled as 1poorguy, beneficiary of 1poormom. You can’t mix this IRA with your own. It will need to stay separate. You are free to roll it over into a similarly titled account with a different broker (or multiple brokers if you are so inclined), but they need to remain with the beneficiary titling.

Beneficiary accounts like this are a reasonably common thing to happen, so if there are any troubles with getting the right title on the account, you are almost certainly speaking to someone incredibly inexperienced. Rather than attempt to train them, just escalate up the broker’s chain of command to someone who does know what they’re doing.

–Peter

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I presume that the RMDs will be stopping until the account is transferred to a beneficiary account for you, which will probably take at least a few days after you provide the death certificate if you keep it at the same brokerage - longer if you want to transfer to another brokerage. For 2023, the total taken out of the account must be at least the RMD amount that your Mom was required to take. So be sure that for 2023, the total distributions that she had received plus the distributions that you receive total up to at least the RMD that she was required to take in 2023. You will have to take out enough to make up for any of the distributions that were missed while they were temporarily stopped, and these distributions must occur by Dec 31, 2023.

For future years, you will take out RMDs based on Table I (Single Life Expectancy) in IRS Pub 590-B 2022 Publication 590-B (irs.gov) For 2024, you will start with your age as of your birthday in 2024. For example, if you will turn 60 in 2024, your life expectancy will be 27.4 years. 1/27.4 = 0.365 or 3.65%, so you would need to take at least 3.65% of the account balance as of Dec 31, 2023. Then, each year after that, you will subtract 1 from the 27.4 and use that as your denominator. So for 2025, 1/26.4 = 3.79%, so you would take out at least 3.79% of the balance as of Dec 31, 2024 Then, because you need to empty out the account by the end of 2034, in 2034, you will need to take the remaining balance out, so it’s down to $0 by the end of 2034. If you have anything that pays end of year dividends, you should be sure that they will distributed to you by Dec 31, 2034. (If you will turn an age other than 60 in 2024, you will need to substitute the life expectancy from Table I for the 27.4 in the calculation.)

If, for tax planning purposes, you don’t want to leave a large balance to be taken out in 2034, you could take 1/10 of the Dec 31, 2023 balance out in 2024, then take 1/9 of the Dec 31, 2024 balance out in 2025, repeating through 2034, when you would distribute the entire balance.

Or you could empty out the entire account any time before the end of 2034, for example, if you want to take a grand vacation or buy a new car courtesy of Mom. Just be sure to take minimum RMDs until the year you do the total distribution, and be sure to adjust any estimated tax payments to avoid underwithholding penalties.

AJ

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Thanks, AJ. I like your idea of 1/10, 1/9, etc. Maybe even a little faster, since the basis steps-up (correct?). Very little taxes. Plus the lesson I learned from mom is that you should not put off things you want to do, because one day you won’t be able to do them. And then it’s too late.

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Since you are taking RMDs from an inherited IRA there is no basis to step up and the RMDs are taxed as simple income.

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Of course. You’re right. Should have thought of that.

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So I did the EIN application. It popped up a notice that she has unpaid taxes dating back to 2000 (the trust was established in 1999). Which is nonsense. She’s paid taxes every year, and for the last several years we had an accountant do it.

So either I messed it up (I did pull the name directly off the trust paperwork as amended in 2019), or the new number associated with an old trust is generating confusion in their system. I forwarded it to said accountant, and hopefully he has some wisdom to impart.

If I messed up, apparently I can’t change anything after submission. So I probably would have to void it and do a new submission?

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Not the end of the world. You made a minor, but common, mistake. When it asked for the date the trust began, you put the date your mother created the trust (apparently 1999). They really wanted the date she passed away. That is the date the trust began operating as an entity separate from your mother.

The letter that says you have lots of back tax returns is just advisory. You may safely ignore that part of it. But when you file the first return, be sure you enter the date she passed away as the date the trust began.

—Peter

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Thanks. I’ll hand the taxes off to her accountant as I always have since I started managing her finances. I flagged him about this, also. Good to know there is an easy fix.

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