Legal Question in Wills and Trusts in Massachusetts
effect of distribution on taxes and fund held for minor
Grandmother in Florida included in her will a bequest to a minor grandchild in Massachusetts. It comes in the form of a distribution from the grandmother's IRA. Due to the inclusion of this distribution in grandchild's AGI for the year, pushing it past the $25K threshold, suddenly some unrelated SSI payments the grandchild had been receiving for several years, were now taxable in that one year. Will specified grandchild will get funds at age 21 - a custodial account was created (not a trust).
A) Its it reasonable to have the income taxes on the actual distribution deducted from the custodial account on behalf of the minor (so she doesn't have to come up with separate funds to pay the taxes)?
B) Is it also reasonable to deduct additional funds from the custodial account to pay the taxes on the SSI income, which is only taxable in that year specifically due to the higher AGI due to the distribution? The IRS is looking for the tax.
C) If the will specifies age 21, then even if the grandchild agrees and is now 18, if a small amount of money was deducted from the custodial account specifically to buy things for the grandchild, should this money really be replaced into the custodial account?
4 Answers from Attorneys
effect of distribution on taxes and fund held for minor
It depends on the specific terms and the language of the will which created the account. Someone must be in charge of the custodial account. I would suspect that the account for which the child is the beneficiary, is apparently using the child's social security number. I do not understand why a trust account was not created.
If you have more information, I will be glad to add to my opinion.
Re: effect of distribution on taxes and fund held for minor
It depends on the language of the Will and the Trust. Also, it may be possible to role over the Account into an IRA account for the minor, check with a CPA, and avoid the tax altogether. Without reading the provision in the Will it is difficult to tell. Also, the income tax on the distribution should be paid by the estate unless it is a distribution to the child as a contingent beneficiary of the IRA directly.
If it is a direct distribution, you may be able to rollover part or all of the distribution and avoid the tax in its entirety. The child can then use the money as early retirement savings for herself.
Good Luck.
Re: effect of distribution on taxes and fund held for minor
Any specific bequests in her Will can only be distributed from her probate estate. However, IRA funds are distributed outside of the decedent probate estate. Instead, they go directly to the designated beneficiaries or contingent beneficiaries.
Regardless, your questions are best answered by a tax attorney or accountant.
Re: effect of distribution on taxes and fund held for minor
Although you are well advised to contact an accountant, from the facts you present (a bequest in the will, and not a beneficiary provision in the IRA agreement), the tax provisions of the will should be checked, as the estate may have some obligation in that regard (this might require review by Florida counsel). Otherwise, it would be reasonable to pay income taxes on the distribution from the custodial account. As far as using the custodial account to purchase things for the grandchild, it may be okay, provided that it is not substituting for support obligations of the parents. It would be a good idea to discuss with an accountant, bringing in all relevant documents in your possession concerning the IRA.
(The accountant will advise you on the impact of having taken the full distribution as a lump sum, instead of spreading it out, but speak to them first. They may refer you back to a tax attorney.)