Q: My wife and I are retired and she is required to take funds out of her retirement IRA. Several years before we retired, we established a living trust which includes most of our assets. Now, we want to transfer her retirement IRA to the trust. We have been told that, by transferring her IRA to the trust, she would be required to pay substantial income tax. Is it possible to make the transfer without having to pay taxes at the time of the transfer?
A: I'm not sure what you mean by transferring your wife's IRA to your living trust. If you mean taking the funds out of the IRA and depositing the proceeds into an account titled in the trust, there is no way to do that without triggering the tax on the IRA withdrawal.
You may be referring to the beneficiary designation. If you are asking should the trust be the beneficiary of your wife's IRA, the answer is probably no from a tax perspective. Here's why. If your wife dies before you do and your trust was designated as the beneficiary of her IRA, there would be no way to defer the tax on the balance in her IRA account. It would have to be paid to the trust within a relatively short period of time and the entire distribution would be taxable. It would be better for you to be the beneficiary, as you could defer recognizing the bulk of the IRA, aside from required minimum distributions, for your life, as well. There are special rules that allow a person to defer the tax on an IRA inherited from their spouse. A trust does not have the same advantage.
The IRA rules are complicated and each couple's situation is unique. As a result there are a number of potential planning opportunities as well as pitfalls. Once an IRA account holder dies, the options are reduced. Consulting with a tax adviser who is familiar with these rules while both spouses are still alive could help you maximize the opportunities while avoiding the pitfalls.