I own an IRA annuity in my name. My wife also owns an IRA annuity under her name. Can we put both these annuities into our irrevocable living trust without paying tax or being penalized?
No. An IRA can only be owned by an individual.
If you transfer it to a trust, you've made a taxable distribution of the entire account. You'll owe ordinary income taxes on the amount transferred, plus a 10 percent early withdrawal penalty if you're younger than 59½. (Similar restrictions apply to annuities even when they're not in IRAs: An annuity loses its tax-deferred status if you transfer it into an irrevocable trust.)
You can make a trust your IRA beneficiary. For example, if you want to leave the IRA to a minor child, it's best to leave it to a trust for her benefit. This won't transfer IRA ownership to the trust because a non-spouse beneficiary can't own an inherited IRA. And although making a trust the IRA beneficiary won't eliminate taxes on IRA distributions, they'll be stretched over the child's lifetime.
If the trust is correctly worded, the Internal Revenue Service treats it as a conduit: After your death, the trust takes annual required minimum distributions from the IRA based on the child's life expectancy. It pays them to the child, who pays income taxes on them. The IRA balance keeps growing tax-deferred outside the trust.
And what if the IRA distributions stay in the trust? Then they're taxed at much higher trust rates. What if the trust doesn't take the annual required minimum IRA distributions? Then it becomes subject to onerous penalties in addition to taxes.
The bottom line There's no way to avoid the eventual tax bill on your IRA. Sooner or later, you or your heirs will pay income taxes on these savings.
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