Can I Place My IRA in a Trust?
Planning with IRAs and Trusts Requires Good Advice and Counsel

Can I Place My IRA in a Trust?

Unfortunately, you can’t place an individual retirement account (IRA) in a trust while you’re alive. This rule applies to all types of IRAs including traditional, Roth, SEP, and SIMPLE IRAs says Investopedia’s article, “How Can I Put My IRA In a Trust?”

However, if you establish a trust as part of your estate plan and want to include your IRA assets, you need to look at the characteristics of an IRA and tax consequences concerning certain transactions.

IRA accounts were designed to achieve two goals. First, they provided tax-deferred retirement savings for individuals not covered under an employer-sponsored plan. For those who were covered, IRAs provided a spot for retirement-plan assets to continue to grow, when and if the account holder changed jobs via an IRA rollover.

IRA accounts can only be owned by an individual. They can’t be held in joint name and can’t be titled to an entity, like a trust or small business. Contributions can also only be made, if certain criteria are met, such as the owner must have taxable earned income to support the contributions. A non-working spouse can own an IRA but must receive contributions from the working spouse and the working spouse’s income must satisfy the criteria.

No matter the source of the contributions, the IRA owner must remain constant. Only certain ownership transfers are permitted to avoid being categorized as a taxable distribution. If transferred to a trust, IRA assets become taxable, because this transfer is seen as a distribution by the IRS. In addition, if the owner is under age 59½ at the time of distribution, there’s an early withdrawal penalty. The trust can accept IRA assets of a deceased owner, however, and establish an inherited IRA.

Naming a trust as the beneficiary to an IRA can be a good idea, because owners can instruct the beneficiaries on how to use their savings. A trust can be created, so that special provisions for inheritance apply to specific beneficiaries. This can be a helpful option, if the beneficiaries vary greatly in age, or if some of them have special needs to be addressed.

Planning should consider how beneficiaries will take possession of IRA assets and over what time period. Get professional advice from a trust and estate lawyer. Ask the attorney about getting the maximum stretch option for the distribution of the account. The trust will need to have specific terms, such as “pass-through” and “designated beneficiary.” If it doesn’t have terms for inheriting an IRA, it should be rewritten, or specific people should instead be named as beneficiaries.

While moving all assets into the name of a trust and designating it as the beneficiary on retirement accounts is common, it is not always a good decision. Trusts, like other non-individuals that inherit IRA assets, are subject to accelerated withdrawal requirements. Most of the time, these must take place within five years from the original IRA owner’s death. Without the proper “pass-through” terms, stretching the withdrawals over a lifetime isn’t an option. Depending on the size of the account, this could place a major burden on the beneficiaries. It’s especially detrimental to eliminate the spousal inheritance provisions by designating a trust, instead of a spouse as the beneficiary.

Planning for IRAs requires good advice and counsel.

Reference: Investopedia (November 26, 2019) “How Can I Put My IRA In a Trust?”

What Should I Know About Joint Tenancy?
Joint Tenancy

What Should I Know About Joint Tenancy?

Investopedia’s recent article, “Joint Tenancy: Benefits and Pitfalls,” explains that it’s a common practice for couples and business partners to take title to each other’s bank accounts, brokerage accounts, real estate and/or personal property, as joint tenants with rights of survivorship (JTWROS).

Joint tenancy (JTWROS) is a type of account or title, where the asset is owned by at least two people and all tenants have an equal right to the account’s assets.

They all also have survivorship rights, in the event of the death of another tenant. Therefore, when one partner or spouse dies, the other receives full title to the asset. Let’s take a closer look at JTWROS.

When a person passes away, his will is examined by the probate court. The court will decide whether the will is valid and binding and determines if there are any outstanding liabilities and assets of the deceased. After addressing any debts, any remaining assets are distributed to the heirs, according to the instructions in the will. However, if a person dies without a will, the probate court will divide the assets pursuant to state intestacy law.

Because joint tenancy with right of survivorship automatically transfers ownership to the surviving spouse or business partner at the death of the first partner, there is no probate for this asset. When a married couple or two business partners own an asset that is titled JTRWOS, both are responsible for it, so both enjoy its positive attributes and share liabilities equally. However, neither party can incur a debt on the property without indebting themselves.

When the surviving spouse or business partner assumes control over the asset titled JTWROS at the death of the co-tenant, she can sell it, or give it away.

The alternative to JTWROS is a tenancy in common. With that form of ownership, each owner may own half of the asset, or a percentage or fractional ownership can be established. Each party can also legally sell his share, without the other party’s consent. Second, the asset will pass to heirs.

Both JTWROS and tenancy in common have some nice benefits. However, before you set up either, every party should assess their situations, to determine whether one option is better than the other.

Learn more about joint tenancy.

Reference: Investopedia (May 28, 2019) “Joint Tenancy: Benefits and Pitfalls”

Will We Have to Pay Gift Taxes if We Give Property to a Child?
Gift Tax Might Be Due Upon Gifting to a Child

Will We Have to Pay Gift Taxes if We Give Property to a Child?

Older couples frequently invest in real estate. Many manage rental properties as an income stream. Let’s say that a couple jointly bought a rental property worth $120,000 this year with their adult son. The son started his own limited liability company (LLC) and is a single owner. The parents plan to transfer the property to him, so he can use the rental income from the business for college expenses. A common question is whether there will be any gift tax implication for the parents, if they move the property to their son’s LLC.

The Washington Post’s recent article, “How to avoid gift taxes when shifting ownership of rental property to offspring,” answers that question by first assuming that the parents and the son purchased the rental property together in their own names. The son recently set up the LLC to use as the holding company for this rental property and other real estate properties he may own.

As far as gift tax implications, the couple have the ability to give their son $30,000 this year without having to file any federal gift tax forms or having any effect on their federal income taxes. Each person has the ability to gift another individual up to $15,000 a year without any IRS issues or the filing of forms. If each parent gave their son $30,000 this year and $30,000 next year, then that would effectively transfer their share of the property to him.

We’ll also assume that when they purchased the property, the parents paid closing costs and may have had other expenses while they’ve owned the property. Those expenses would play a part when calculating the tax basis of the property.

Assuming that the parents and their son each paid $60,000 for the property, when the son transfers the property from all the owners’ names into the LLC, the parents may have a taxable event for IRS purposes. That’s because the parents are effectively giving away ownership of their share of the property to their son. He’ll now own the property on his own. If the son signs a promissory note to the parents for $60,000 at the time of the transfer to the LLC, he’ll have an obligation to repay them the money for their share over the next six months. They could forgive $30,000 of the debt immediately and then they could forgive the other $30,000 in the new year. Their son would probably owe a little interest, but he could probably pay that from the income he receives from the rent.

This is just one solution to the transfer. There are many others, and some are much more complicated. Speak with an experienced estate planning attorney to review these issues and explore some other ideas that could work to everyone’s benefit.

Find out when gift tax might have to be paid.

Reference: The Washington Post (November 11, 2019) “How to avoid gift taxes when shifting ownership of rental property to offspring”