IRA Conduit Trust

[tobee43]

Thanks!

i did want to mention to you, the trust i'm working on now, (i rarely see the billing), however, this was a HUGE trust i have working on and the total cost was under 2k. so i can't imagine if you did go to an atty it would be that costly. that is, if you are having second thoughts about doing it yourself.

[debee]

just a thought for you debee..i'm so sorry as it seems as though you have gone through so much in your life. i am sorry to hear about your husband and know it's most likely been very difficult. i also know you CAN DO THIS

Thanks!

[tobee43]

This is a federal income tax issue. The regulations and codes cited are to U.S. Treasury Regulations and the Internal Revenue Code. If it satisfies the IRS, your good to go in California.

debee, I think you should go for it.

great to know LITR, i didn't know if there were any special tax ramifications in calif.

yeah! go for it!


just a thought for you debee..i'm so sorry as it seems as though you have gone through so much in your life. i am sorry to hear about your husband and know it's most likely been very difficult.

i also know you CAN DO THIS

[LadyInTheRed]

sorry the only one i could get was from TEXAS....so where certain statues are listed you would have to insert you're state's related statues.

This is a federal income tax issue. The regulations and codes cited are to U.S. Treasury Regulations and the Internal Revenue Code. If it satisfies the IRS, your good to go in California.

debee, I think you should go for it.

[debee]

i think very doubtful and bite your tongue! maybe time to look around for somone else in you're mother's stead.?

The kids want to go their Papa. He's alright, but he's married to a dingbat. Hopefully they never end up there. My husband died recently and that got all of us thinking about how little prepared I am. He left a sizable estate in retirement accounts and insurance proceeds. I'd like to preserve that for the boys.

Thanks for the links and info. I had seen this Texas stuff before & LITR also posted this link. It got me thinking when you said that attorneys would have the doc in their computer and just make a few changes and then kick a new one out. Gets me thinking maybe I should pore over this material (& LITR's links and some others I found) and give it a whirl after all. From bold to chicken to bold in a single thread. Like some kind of Anti-hero.

Thanks to you and LITR for posting on this thread!

[tobee43]

debee:Everything I've read so far suggests that I need and want a Conduit Trust. Another benefit is that if either of my kids grows up to be a moron, the trust protector can stop the distributions and convert the conduit trust into an accumulation trust. And in the event of my death, my kids would be raised by my mother which significantly increases their chances of growing up to be morons.

i think very doubtful and bite your tongue! maybe time to look around for somone else in you're mother's stead.?

[tobee43]

sorry the only one i could get was from TEXAS....so where certain statues are listed you would have to insert you're state's related statues. actually i think the total document is maybe 18 pages at most and most probate attys have them already in their computer and can kick them out in a ny minute, the only increased cost would be certain changes etc you may want to incorperate. hope this helps a bit. i'm going to insert the intro to the explanation of the basis of the trusts for the "board" readers, just to help some understand if they are at all interested in what a conduit trust is

"SAMPLE CONDUIT TRUST FORM

Individual retirement accounts2 (“IRAs”) can present challenges to attorneys in designing and implementing an estate plan for a client. Set forth below is a brief description of certain issues faced in planning with an IRA which can be addressed through the use of a conduit trust.

Designated Beneficiary Issue

The minimum required distribution rules contained in Code Section 401(a)(9) mandate that a certain amount of the IRA balance be distributed out from the IRA annually to the participant (after his/her “Required Beginning Date,” as defined in Code Section 401(a)(9)(C)) or the beneficiary(ies) designated by the participant to receive the IRA at death. The balance of the IRA is permitted to grow in a tax-deferred manner.
The extent of the ability of a successor to an IRA to continue to be able to take advantage of the tax-deferred growth of assets inside the IRA depends upon the identity of the beneficial recipient(s) of the IRA named by the IRA participant. If the named recipient is not a “designated beneficiary” for the minimum distribution requirement purposes set forth in Code Section 401(a)(9)4, then the balance of the IRA must be distributed out (i) by December 31st of the year in which the 5th anniversary of the participant’s death falls or (ii) if the participant had reached his or her “required beginning date” before death, over the participant’s remaining actuarial life expectancy as of the participant’s death.

Individuals qualify as designated beneficiaries, as do beneficiaries of trusts which meet certain requirements.5 The inclination of many clients is to opt for simplicity and designate a spouse or children on the beneficiary designation when opening an IRA at a financial institution. However, that may not be advisable for several reasons.

Asset Protection Issue

Texas law provides that “a person's right to the assets held in . . . any individual retirement account . . . is exempt from attachment, execution, and seizure for the satisfaction of debts unless the plan, contract, or account does not qualify under the applicable provisions of the Internal Revenue Code."6 While the statute does not explicitly differentiate between an IRA created by a person or an IRA inherited from another person, the Bankruptcy Court has found that under Texas law a creditor of a beneficiary of an inherited IRA may reach the assets inside the IRA.7
In order to protect an IRA from the creditors of a beneficiary it is necessary to designate a trust as the beneficiary recipient of the IRA in order to take advantage of spendthrift protection afforded to non-self settled trusts under Texas law. However, the concern of many attorneys is in ensuring the trust is structured in order to satisfy the requirements of Treas. Reg. Section 401(a)(9)-4.


Conduit Trust Solution

If a trust meets the definition of a conduit trust set forth in Treas. Reg. §1.409(a)(9)-5, A-
7(c)(3), Example 2, then the oldest individual beneficiary of that Trust will be deemed the
designated beneficiary of any IRA payable to the Trust for purposes of the minimum distribution
requirements of Section 401(a)(9). Consequently, the “minimum required distributions” for that
IRA will typically be calculated based upon a presumed withdrawal of the IRA’s contents over
that beneficiary’s life expectancy, determined as of the participant’s death. This typically
translates into a longer period of deferral than the default 5-year payout or a payout over the
participant’s remaining actuarial life expectancy (if death occurred past the required beginning
date). This ability to “stretch out” the withdrawal of the IRA’s contents correspondingly
maximizes the opportunity for the continuation of the income tax deferred growth of the assets

inside of the IRA.

The look through trust requirements generally require (i) the trust be valid under state
law; (ii) the trust is irrevocable or will be irrevocable upon the death of the IRA participant; (iii)
the beneficiaries are identifiable; and (iv) the trust document is provided to the IRA custodian by
October 31 of the calendar year following the death of the IRA participant. Please note that
these requirements require careful analysis, especially with respect to the identification of
beneficiaries.

A conduit trust can also offer the asset protection benefits of a spendthrift trust in order to
protect the inherited IRA from a beneficiary’s creditors or a divorcing spouse. A conduit trust
can also prevent a beneficiary who may not have the desired financial maturity from accessing
the assets in the IRA and dissipating them in a prodigal manner.

The following trust is intended to meet the requirements of a look through trust for
purposes of Treas. Reg. §1.401(a)(9)-4.8 This particular trust form creates a conduit trust within
the confines of another trust agreement and is not intended to serve as a standalone trust.
However, it is possible and may be preferable in some situations to create a standalone conduit
trust.

Additionally, it is often desirable for a parent’s IRA to be distributed at death among
separate conduit trusts for the children. In doing so, each child may use his or her own life
expectancy for establishing the minimum required distributions for that child’s trust’s share of
the IRA. In order to accomplish that result, the IRA must be divided at death into separate
accounts for the various trusts in accordance with Treas. Reg. 1.401(a)(9)-8, A-2(a)(2). A
sample beneficiary designation form accommodating that approach is attached as well.


SAMPLE CONDUIT TRUST
ARTICLE XV
PROVISIONS REGARDING CONDUIT TRUSTS CREATED
TO HOLD THE SURVIVING TRUSTOR'S RETIREMENT BENEFITS

Section 15.1. Purpose for and Designation of Trusts

A. Notwithstanding any provision of this Trust Agreement to the contrary, in the event an issue of the Trustors survives the Surviving Trustor, the Surviving Trustor intends to provide for (i) each Retirement Benefit owned by such Trustor to pass at such Trustor’s death to one (1) or more Conduit Trusts (as defined below) created under this Trust Agreement for the benefit of the Trustors’ surviving issue, in such shares as such Trustor shall direct in the beneficiary designation form applicable for such Retirement Benefit and (ii) Separate Accounts (within the meaning of Internal Revenue Code Section 401(a)(9) and Treasury Regulation §1.401(a)(9)-8, A-3) to be created from any such Retirement Benefit so allocated to two (2) or more such Conduit Trusts created hereunder to accommodate the allocation so provided in such beneficiary designation.
B. Each issue of the Trustors for whose primary benefit such a Trust described in Section 15.1.A is to be created shall be referred to in such beneficiary designation and accordingly this instrument as the "Beneficiary" of such Trust, and such Trust shall be named for him or her followed by the words “Exempt Conduit Trust," if the Inclusion Ratio (as defined in Internal Revenue Code (“Code”) Section 2642) of such Trust is zero (0), or “Nonexempt Conduit Trust,” if the Inclusion Ratio of such Trust is one (1), after taking into account the allocation (if any) of the Surviving Trustor’s generation-skipping transfer tax exemption (as set forth in Code Section 2631) thereto. Notwithstanding the preceding, if any such Conduit Trust would otherwise have an Inclusion Ratio greater than zero (0), but less than
one (1) as of the Surviving Trustor’s death after taking into account the allocation (if any) of the Surviving Trustor’s generation-skipping transfer tax exemption thereto, then such Conduit Trust shall be divided into two (2) separate Conduit Trusts for the benefit of the Beneficiary of such Conduit Trust to be so divided (the “Original Conduit Trust”), and (i) one separate Trust so created shall receive a fractional share of the total value of the Original Conduit Trust equal to its applicable fraction (as defined in Code Section 2642) and shall be named for such Beneficiary followed by the words “Exempt Conduit Trust” and consequently assigned an Inclusion Ratio equal to zero (0) and (ii) the other resulting Trust shall receive that fractional share of the total value of the Original Conduit Trust that is equal to the excess of one (1) over the applicable fraction described in (i) and shall be named for such Beneficiary followed by the words “Nonexempt Conduit Trust” and consequently assigned an Inclusion Ratio equal to one (1). In dividing the Original Conduit Trust, the Trustee shall (as the Trustee shall elect) (a) divide the Original Conduit Trust on a fractional basis or (b) allocate assets to each of the Exempt Conduit Trust and Nonexempt Conduit Trust on a non pro rata basis, provided that in making such allocation, such assets are valued at their respective fair market values as of the date of the severance of such Original Conduit Trust in accordance with Treasury Regulation 26.2642-6(d)(4). Notwithstanding the preceding, for ease of reference, an Exempt Conduit Trust or a Nonexempt Conduit Trust may sometimes be referred to herein simply as a “Conduit Trust” if the context of such reference is applicable regardless of the status of such Trust for generation-skipping transfer tax purposes.

Section 15.2. Distributions During Term of Conduit Trusts. Each year, beginning with the year of the Surviving Trustor's death, the following shall apply with regard to the administration of each Conduit Trust created hereunder.

A. The Trustee of any such Conduit Trust shall withdraw from each of (i) the Surviving Trustor’s Retirement Benefit(s) held by and/or payable to such Conduit Trust (if the beneficiary designation form applicable with respect thereto directs that such be held by and/or payable entirely to such Conduit Trust) and (ii) each Separate Account(s) held by and/or payable to such Conduit Trust, as the case may be, the Minimum Required Distribution applicable thereto for such year and distribute such amount (net of expenses properly charged thereto) as soon as reasonably practicable as follows:


1. The Trustee shall distribute to the Beneficiary such amount of such Minimum Required Distribution as is necessary for the health, education, maintenance, and support of the Beneficiary. To the extent such Minimum Required Distribution is not distributed in its entirety to the Beneficiary under the preceding sentence, it shall be distributed to any one or more of the Beneficiary's living issue as necessary for the health, education, maintenance, and support of any such issue.


2. To the extent such Minimum Required Distribution is not distributed in its entirety in accordance with Section15.2.A.1 above, the Trustee shall distribute the balance of such Minimum Required Distribution to the Beneficiary, or if the Beneficiary is then deceased, to his or her then living issue, per stirpes.


3. The Trustee may also, at any time and from time to time, withdraw from (i) and/or (ii) described above in Section 15.2.A, as applicable, and immediately distribute, such additional amount or amounts (net of expenses properly charged thereto) as the Trustee shall deem necessary for the health, education, maintenance, and support of any or all of the Beneficiary and the issue of the Beneficiary who are living from time to time; provided, however, that in determining whether to make any such distribution to an issue of the 5



Beneficiary, the Surviving Trustor directs the Trustee to be mindful of the Trustors’ intent that the primary purpose of this Trust is to provide for the health, education, maintenance, and support of the Beneficiary during his or her lifetime (subject to the requirement that the Minimum Required Distribution applicable in any year in any event be distributed as set forth above).


4. Any distributions made pursuant to either Section 15.2.A.1 or Section 15.2.A.3 need not be distributed equally between or among, as the case may be, the Beneficiary and his or her issue. In making any such distribution, the Trustee shall consider all other resources available to the proposed recipient of such contemplated distribution (however, the Trustors suggest but do not require that any such distribution to a Beneficiary or any of his or her issue be made first from a Conduit Trust rather than from such Beneficiary’s Exempt Trust or Nonexempt Trust). The Trustors are aware that a distribution to the issue of a Beneficiary from a Nonexempt Conduit Trust might be characterized at the time as a transfer subject to the Generation-Skipping Transfer Tax. The Trustors instruct the Trustee to take this consideration into account, along with the other standards listed above, prior to making any distributions to such issue from a Nonexempt Conduit Trust, if any.


5. Notwithstanding the preceding, the Trustors direct that each of the Conduit Trusts created hereunder shall only bear those expenses of trust administration that can be properly allocable thereto and borne thereby without impairing such Trust’s ability to calculate the Minimum Required Distribution for any Retirement Benefit or Separate Account held by or payable to such Conduit Trust based upon the life expectancy of the Beneficiary of such Conduit Trust (the “Allocable Expenses”). Accordingly, except as provided in this paragraph, the Trustee of a Condui tTrust shall not, after September 30 of the calendar year".......

check out the rest so you may be able to use the format: http://www.texastaxsection.org/LinkC...HI%3D&tabid=80

[debee]

The attorneys I work with include the conduit trust language in clients' revocable trusts. That's what the provisions in the links I gave you are designed for. The language creates a separate trust for each beneficiary that is separate from the main trust and will come into existence upon the Trustor's death for the sole purpose of receiving distributions from the IRA. They then advise the client to have the IRA beneficiary designation be something like "The Trustee of the ___________ Trust to be administered pursuant to Article [whatever article has the conduit trust provisions] of said trust."

Yeah, that's what the beneficiary designations in my post spell out too - conduit trust as subtrust of living trust. I guess every lawyer has their own preference for wording. I found some profoundly simple sample paragraphs for establishing a subtrust, but if there was a problem with any of them, I wouldn't know. Of course this fact only gets worse with increasing levels of legalspeak. I think I'm beat and ready to admit that it's too important and there's too much money involved for me to hack it up. Also, some of the samples available online are old and don't take into account recent IRS rulings and that might not matter, but it might, and I don't know enough to know which.

I was hoping to find a quick, sure resource that I could use to draft something up so if I die next week, my kids are covered.

I've read some convincing arguments in favor of stand-alone IRA Trusts so I'm thinking maybe I should just pay an attorney for a Stand-alone IRA Trust, and do the rest - the Living Trust, etc - myself.

I don't know. I'm exhausted at this point. I've been up late reading, reading, reading for a few days now and I'm sooooo sick of it. Must go watch TV and eat chocolate.

[LadyInTheRed]

The attorneys I work with include the conduit trust language in clients' revocable trusts. That's what the provisions in the links I gave you are designed for. The language creates a separate trust for each beneficiary that is separate from the main trust and will come into existence upon the Trustor's death for the sole purpose of receiving distributions from the IRA. They then advise the client to have the IRA beneficiary designation be something like "The Trustee of the ___________ Trust to be administered pursuant to Article [whatever article has the conduit trust provisions] of said trust."

[debee]

Oh, there is another point I forgot to make. If a trust is a beneficiary and the only beneficiaries are individuals (i.e., there are no charitable organizations listed as beneficiaries), the IRA can be stretched out based on the life expectancy of the oldest beneficiary, even without the conduit provisions. So, if the beneficiaries are all individuals and close in age, the conduit trust may not be worth the trouble.

Also, a clarrification. If the individuals are beneficiaries of the IRA, the IRA would have to be divided after your death in order for each beneficiary to use his/her own life expectancy. If the IRA is not divided, the distributions would be based on the life expectancy of the oldest beneficiary.

The first link I provided explains the issues well.

Thanks, LITR. I had read widely on what a Conduit Trust can/can't do so I'm fairly certain that's the way I want to go. I also plan to establish a Living Trust (for other assets) but I won't name that trust as beneficiary for my IRAs.

The most recent info (that I would deem as reliable) that I've read advises against naming the "Debee BKForum Living Trust" as a beneficiary (& then spell out the details within the trust) because many recent rulings have established that the IRS won't allow a trustee to 'stretch' the distributions unless the trust is a Conduit.

I understand what makes a conduit trust so named, and have read the provisions in Private Letter Ruling 200537044 and I understand the five points necessary to qualify a trust as a "see through" trust, but the problem is I can't draft one. Is there some place where trust documents go to die? I would happily dig one up.

I've read that the IRA beneficiary designation should read something like this:

IRA Conduit Trust under Debee BkForum Trust FBO Child Elder 50%
IRA Conduit Trust under Debee BkForum Trust FBO Child Younger 50%

I'm happy to say that I can do this part. It's the actual trust that's driving me into the snake pit, errr, I mean lawyer's office.

[debee]

Losing the ability stretch out the payments is only an issue if a trust is the beneficiary of the IRA, in which case you need the conduit trust provisions. If you make the individuls the beneficiaries of the IRA, they can stretch out the payments. We usually recommend people not make their trust the primary beneficiary of an IRA unless the beneficiaries are minors, can't be trusted to manage their money or need creditor protection.

The problem is that my 'individuals' are minors so they can't legally manage the IRAs. So then I need to name a guardian of property for them or a custodian who will transfer the RMDs to a UTMA account. I researched all these options prior to deciding on the Conduit Trust and also considering the wider facts regarding the overall estate value, my citizenship, the whereabouts of the guardian, etc. So, I definitely know the options and what is best in my situation, the problem is I don't know how to draft it!!!!

And I guess a secondary problem is that I don't want to pay a lawyer to do it.

urgh

[debee]

kudo's to you for doing this yourself. i have being going back and fro to calif. had to work on a spinging trust and pulled about 50 years forward...what a MESS.

after looking at all this stuff, a conduit trust sounds great. since a conduit trust, which is a trust that simply receives the distributions from the IRA and then passes the income out to the beneficiaries, can't it simply just say that??? just with the heading and then the instuction? i would think that would work?

Thanks, tobee. Kudos may be premature as I've been researching this topic for awhile now and have yet to find a fill-in-the-blanks type form that I can use. The NOLO book on Living Trusts is great and they have printable fill-in-the-blanks forms for that kind of trust, but I won't be designating the Living Trust as an IRA beneficiary and I can't find a similar source for the Conduit Trust. There's a book at Amazon, but I hesitate because the author looks fly-by-night.

*pulling out hair* ... or maybe I should say: *pulling out wallet*

The IRS has five requirements regarding Conduit, aka:"see through", trusts and IRAs and I wouldn't want to risk getting any of them wrong.

Everything I've read so far suggests that I need and want a Conduit Trust. Another benefit is that if either of my kids grows up to be a moron, the trust protector can stop the distributions and convert the conduit trust into an accumulation trust. And in the event of my death, my kids would be raised by my mother which significantly increases their chances of growing up to be morons.

[tobee43]

Reading this thread reminds me of how badly I need to learn and understand this trust thing. Sometimes it feels like everything is so darn complicated.......Sigh......

just sayin' - carry on... :o

it's like an never-ending story you got the revocable trusts, irrevocable trusts, bypass of family trusts...or the generation-skipping trusts...how about the qualified personal residence trusts, and yes, there are MORE types...need i say more...unreal. and then once you do thousand or so amendments you have to spring the trust forward...aka and appropriately called the springing trust...LOL!!!!!! it's absolutely nuts, that's all i can say. however, what debee is trying to do is plan carefully for the future of her kids which many of us don't do. and then when you think you understand a few, don't get to comfortable because something's going change. wheeeeeeww...

[df04527]

Reading this thread reminds me of how badly I need to learn and understand this trust thing. Sometimes it feels like everything is so darn complicated.......Sigh......

just sayin' - carry on... :o

[tobee43]

The conduit trust provisions require the creation of a separate trust to administer each beneficiary's share of the IRA so that (1) the IRA can be separate from any assets distributable to any beneficiaries that are not individuals and (2) the distributions can be stretched over each beneficiary's lifetime instead of all beneficiaries having to use the oldest beneficiary's life expectancy.

certainly sounds like the safest and most effective way to protect the distribution of the IRA and possibly also the tax ramifications if any. (although, i understand now the fed tax limit as gone up), i have no idea about calif state and how they handle any tax issues on that type of trust or what if any exceeds any set limits? is it not included with the total of the value of the entire estate then? interesting.

i also have to mention, only because of the recent work i have been doing in calif. that calif is a whole different planet when it comes to this estate planning and execution and preparation.