TrustCare™ Questions Answered:
Is Money Distributed From An IRA Account Taxable?
Money that is distributed from an IRA account is taxable income. The only time money from an IRA is not taxed is when it passes from one spouse to another after the death of the first or under certain circumstances when it is given directly to a qualified charity.
When setting up a trust for a married couple, our normal recommendation is to name the spouse as the primary beneficiary and the trust as secondary beneficiary. Why? Because the spouse can receive this money without triggering income tax and because the trust cannot receive this money without paying income tax. A surviving spouse will normally “roll” this IRA into his or her own name. Once an IRA reaches the trust, however, all distributions are taxable income to the trust beneficiaries. Beware, however, not all trusts have the required tax-planning language to help reduce the total income tax bill your beneficiaries will be required to pay.
You May Be Asking: Why Is This Different From Life Insurance Policies?
The death benefit of a life insurance policy is not taxable income. Because that money is already income tax free, it should go straight into the trust where its value remains privately held by the surviving spouse in the trust. This recommendation prevents the scenario of having to probate the assets when the surviving spouse passes away or one of your children predeceases you. As you now know, the privacy offered by the trust is lost in probate and the beneficiaries are forced to wait out the long court process to receive that money. This way your successor trustee (whether your spouse or someone else) has immediate access to the life insurance.
Estate planning has many benefits. It can be overwhelming to know exactly how to prepare so that your family is not burdened by the attorney fees and costs around probate. To learn more, visit our website to register for one of our free monthly seminars: Complimentary Living Trust Workshops