IRA Beneficiary
32. Benefits of Using Trusts
First, Sue has complete control over everything in her trust. Plus, she used the spousal rollover option on Bob's IRA, giving her control of that money. But she cannot have complete control over the assets in Bob's trust. If she did, they would have to be included in her estate when she dies.
However, Sue is beneficiary of Bob's trust. As shown here, she can receive income from his trust, and principal from it if needed for health, education, maintenance and support. So, even though she cannot have complete control over the assets in Bob's trust, they are available to provide for her for as long as she lives. After Sue dies, Bob's trust can provide for his other beneficiaries, which could be the same as or different from Sue's beneficiaries.
With this arrangement, Bob keeps control over how his part of their estate is managed and distributed. Also, the assets in his trust are valued and taxed at his death; any appreciation will not be included in Sue's estate.
This is an ideal situation. Bob and Sue fully use both their estate tax exemptions, plus they get the spousal rollover and stretch out on Bob's IRA. It's great planning - as long as Bob dies first.
But what happens if Sue dies first? Depending on the size of Bob's IRA, most or all of the assets will then belong to Bob, so they'll waste some or all of Sue's estate tax exemption. That will cause them to pay more in estate taxes.
It would be nice, from a planning point of view, if we knew which spouse will die first. But most of us don't know. So you've got to assume that either spouse could die first, and do the best planning that you can do.