A husband and wife developed an estate plan that included a trust which was subdivided into Trust A, Trust B and Trust C. Trust A would contain the survivor’s separate and community property (Survivor’s trust). Trust B would contain the balance of the decedent’s estate (Decedent’s Trust). And Trust C (Marital Trust) allowed the surviving spouse to fund it with property or cash.
The husband died, he and his wife were residents of a community property estate at the time of his death. Prior to his death the husband had transferred two of his IRA accounts into one combined IRA and made the family’s revocable trust the primary beneficiary of his IRA.
Upon the husband’s death the wife has the power to amend, revoke, or terminate Trust A and as sole beneficiary of that Survivor Trust she will receive income and can take the corpus out at any time.
However, she cannot amend, revoke or terminate the Decedent (Trust B) or Marital (Trust C) Trust. She has the right to receive income or corpus from the trust as needed for her support, health, maintenance and education.
Under the foregoing scenario the survivor and successor trustee, the wife, could have the IRA distributed to Trust A, then withdraw the funds, and move the amount into an IRA in her own name. As such she may be treated as the payee or distributee of the IRA, the IRA would not be treated as an inherited IRA and she is eligible to move over the distribution to set up an IRA account in her own name. Considering the foregoing she would not have to report the IRA distribution as income if properly moved over.
This is an example of a significant benefit in utilizing a family or revocable living trust for purposes of managing retirement assets after the death of the first spouse.