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Sunday, January 18, 2009

Unintended Consequences 101: The effect of the waiver of RMD in 2009 upon so-called "conduit trusts"

Previously I mentioned the fact that Congress has waived the Required Minimum Distribution (RMD) requirement for IRAs for this 2009 tax year, However, there are always unintended consequences. Here, certain trusts may not be sufficiently flexible to take this tax law change into account. According to a recent article in the Redland Daily Facts:

The new tax law could present problems for trusts that are set up to control post-death distributions to beneficiaries. Many trusts did not take suspension of the RMD into account. If the trust was set up as a conduit trust (or a "trusteed IRA"), where all RMDs (and only RMDs) would be paid out from the inherited IRA to the trust, and then from the trust to the trust beneficiaries, then the trust beneficiaries will receive nothing in 2009, since there are no RMDs for 2009. Chances are this is not at all what the IRA owner would have wanted. I would guess there are going to be some very unhappy trust beneficiaries that will not like this kind of tax relief. IRA expert Natalie Choate suggests if you are considering such a trust for your beneficiaries, consider giving the trustee more flexibility - for example, directing the trustee to distribute to the trust beneficiary each year the minimum required distribution "and such additional amounts, if any, as the trustee deems advisable for the beneficiary's health, education, and support," or to distribute "the greater of the RMD or the income of the IRA each year".

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