Living trusts give privacy, but not from Uncle Sam
Q We are thinking of setting up a living trust for our father, who is well along in years. Are assets in living trusts sheltered from the IRS, since living trusts are nonpublic documents, unlike wills which are publicly probated?
A No. Assets in a living trust are not sheltered from the IRS, but are part of the trust-creator's estate, says Ed Slott, an accountant and editor of "Ed Slott's IRA Advisor," a newsletter. Although such trusts are kept from public records, they can be looked at by the IRS.
QIt is my understanding that a person must withdraw 1/16 of a traditional IRA no later than April 1 of the year following the year he or she turns 70 1/2 (assuming the single-life recalculation method is used and "mortality tables" show the person has 16 years left). The exact amount withdrawn would be based on the IRA's value at the end of the calendar year preceding the year he or she turned 70 1/2.
Assume an IRA is worth $160,000 on 12/31/98, the year prior to the year a person reaches age 70 1/2. He or she would be required to take out $10,000 by April 1, 2000. (Since $160,000 x 1/16 equals $10,000.) But what if the $160,000 was in an extremely risky mutual fund that suddenly became worthless after 12/31/98, but before the required distribution date? Would the person still have to distribute $10,000?
S.W., Park Forest, Ill.
A"You are exploring a very unlikely hypothetical question, but missing the main issue in your scenario," says Mr. Slott.
If the balance fell to zero after 12/31/98, you obviously wouldn't have to distribute $10,000 because there would be nothing to distribute, he says.
You are also overlooking a better method of distribution.
"No one uses the single-life recalculation method unless they have absolutely no friends or are making a mathematical mistake," Slott says. You should be using the "joint life, term-certain distribution method."
This method entails selecting a beneficiary. Using joint life, you will come up with a much lower math factor than the 1/16 determined by the single life method and, in turn, lower your distribution amount.
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