How to Inherit a Roth IRA Outright From a Trust at Schwab

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Trusts are often bad to IRAs when they are the final heirs. The average trust is really just a will substitute, designating beneficiaries and allowing the assets to pass on to new owners almost immediately. These will-like trusts normally handle Roth IRAs okay, but the process is cumbersome. Here are the steps to inheriting a Roth IRA outright when a trust is involved.

Imagine the following scenario. Jane owned a Roth IRA. When she died, her designated beneficiary is 100% The Jane Trust. Her daughter Susan is the trustee of that trust. The trust document says that after her death, trust assets should be distributed in equal shares to her children per stirpes. Her children are Susan, Samuel, and Samantha.

This imagined simple scenario requires a minimum of an IRS employer identification number (EIN) application, 5 forms, 3 notarized signatures, 3 document requests, and 2 phone calls. Even with everyone’s focused attention and the help of a professional, the process will likely take at least 2 months. Without help, as a side project, or with an unresponsive heir, it could easily take longer.

Here is how this “simple” inheritance looks at Schwab:

Someone provides Schwab a copy of the death certificate.

Before Schwab will process any paperwork, they will need a copy of the death certificate. Luckily, you can simply upload a scan; you don’t need to mail them an official copy.

This is required for all inheritance scenarios, not just when a trust is involved.

Someone provides a notarized signed Affidavit of Domicile.

The Affidavit of Domicile is an odd piece of paperwork. On the face of it, it looks like you are just attesting that you know where the decedent lived during the past three years. This seems like an odd thing to have to have notarized. However, the form also attests that you have information regarding the decedent’s debts.

Schwab’s reads in part:

3. Affirmation

Any and all debts of the deceased, claims against the estate, administration expenses, inheritance and estate taxes, and legacies having priority have been provided for or paid.

4. Signature of Authorized Representative

I, as the Authorized Representative indicated in Section 2, duly swear or affirm that the information in Section 1 is correct and true. I have read carefully and understand the Affirmations in Section 3.

This is required for all inheritance scenarios, not just when a trust is involved.

Trustee opens an Inherited IRA in the name of the trust.

Trustee acquires a tax identifier for the trust.

To open accounts or file taxes for an irrevocable trust, you need to acquire a tax identifier number (TIN) from the IRS for the Trust. Oddly, trusts use an Employer Identification Number (EIN) as their TIN. As the IRS says:

You may apply for an EIN in various ways, and now you may apply online. This is a free service offered by the Internal Revenue Service and you can get your EIN immediately

Trustee fills out and provides a notarized signature on “Inherited IRA Application for a Trust Beneficiary” form.

For a trust to inherit an IRA, you need to use an “Inherited IRA Application for a Trust Beneficiary” form at Schwab. This form is admittedly very confusing. The PDF is 24 pages long with 15 of those pages being the form. It must be signed by the trustee and notarized. The pages are littered with estate lingo which must be understood to fill out the form properly. Those unfamiliar with finances and estate planning will likely need professional help.

Attach relevant Trust pages.

To complete the trust account application, you will need to attach a copy of the title / first page of the Trust document, all the signature pages of the Trust documentation, and any page(s) listing the current trustee. Be sure to excerpt the trust document to only include the requested pages. Including extra pages could slow down the process as Schwab’s risk assessment team does not want to accept any of your fiduciary duty and may require your signature on further legal contracts stating as much.

Heirs open Inherited IRAs.

Each heir uses an “Inherited IRA Account Application for Individual Beneficiary” form to open their own inherited IRAs. They will need to gather sensitive information about the decedent, like Social Security Number and the old IRA’s account number, in order to complete the form. This means they will often need the help of Schwab, the trustee, or a financial advisor to get this paperwork properly filled out.

Trustee divides the trust-owned IRA to the heirs.

Open a Case ID with the Schwab Estate Department.

The trustee should call Schwab and tell them that the trust document requires you to divide the Roth IRA outright to the beneficiaries. Schwab will open a Case ID, assign you a team who will handle your request, and detail much of the information in this article to you.

Provide relevant trust document pages.

Schwab will request that you provide them with the pertinent Trust pages. In this case, those pages will be the ones that show the distribution instructions. Don’t provide too many pages or you could slow the process down.

Trustee signs a request letter.

Schwab calls the process of dividing a trust-owned inherited IRA outright to the beneficiaries “bypassing the trust.” I guess the idea is that you are dodging the trust to go right to the heirs, but this is confusing for multiple reasons. First, if you do it the way I described above, you are not bypassing the trust; you are merely distributing outright to the heirs. Second, the more familiar “Bypass Trust” strategy is a completely different thing.

With that clarity added, Schwab requires that the Trustee sign a letter which includes (their words):

  • A request to bypass the trust and an explanation of why the trust is being bypassed
  • The decedent’s name and Schwab account number (if the decedent was not a Schwab client, note this fact)
  • The name, date, and account number of the trust account to bypass
  • The name(s) of all current trustees
  • The names of all beneficiaries requesting to receive assets, their portion of the assets, how they will receive them, and account numbers (if the accounts are open) – Example: John Doe, 50% into Inherited IRA 1234-5678. Jane Doe, 50% spousal rollover, account number TBD.
  • Confirmation that the beneficiaries listed are the only beneficiaries of the trust. If there are beneficiaries that are not receiving assets as part of this distribution, provide an explanation for this.
  • Confirmation that all beneficiaries are adults and not incapacitated
  • Include the names of the minors or incapacitated beneficiaries and the name of the parent, legal guardian, or attorney-in-fact. Additional documentation, such as Letters of Guardianship, may be required.​

Here is an example of a letter we have used:

Bypass Request Letter, CASE ID #: [Case ID]
Dear Schwab Risk and Estate Departments,

[DECEDENT] owned a Roth IRA at Schwab ([ACCOUNT NUMBER]) and died on [DATE]. [He/She] named as the 100% beneficiary [OFFICIAL TRUST NAME] of which I, [TRUSTEE NAME], am the only trustee. That trust has inherited those assets into an inherited Roth IRA at Schwab ([TRUST ACCOUNT NUMBER]).

The trust document states that we should divide the trust property into equal shares, one for each of [DECEDENT]’s children per stirpes to be owned outright and free of trust.
[DECEDENT] had four children all of whom survived [him/her], are adults, and are not incapacitated. They are [NAMES OF HEIRS]. These listed individuals are the only beneficiaries of the trust.

To complete the trust division, I request that you transfer an equal share from the trust-owned inherited Roth IRA ([TRUST ACCOUNT NUMBER]) to each of the following individually owned inherited Roth IRAs for the heirs:

  • [HEIR], Inherited Roth IRA, [HEIR’S ACCOUNT NUMBER]

This should be an equal 1⁄3 share to each account.

Sincerely,

[TRUSTEE SIGNATURE]

Once these documents have been received in good order, Schwab will conduct a review. Depending on the complexity of the request, this review may take several weeks.

Everyone signs Schwab’s hold harmless letter.

If Schwab approves of your request, then they will generate hold harmless letters for all the beneficiaries to sign. These letters are often multiple pages of text which describe the basic details of your request and then make it so that if you have done something horribly wrong in those actions, Schwab is not held liable in any way for your decisions. The heading of the document is “Indemnification, Release and Hold Harmless Agreement.”

Each heir will need to provide a notarized signature.

Call Schwab again to remind them to divide the account.

After receiving the hold harmless letters, Schwab often will require a phone call to remind them that you are waiting for them to divide the account. With that reminder, they should complete the distribution, assuming all your documents are in order.

Conclusion

As you can see, this process is long, tiring, and tedious. If you are considering leaving your IRA to a Trust, I would suggest that you should have a really good reason for it.

If your trust is going to immediately leave the assets outright to a known set of heirs in known shares such that the end result of leaving your IRA to the trust is the same as leaving your IRA directly to the heirs, I am of the persuasion that beneficiary designations directly to your heirs are a cleaner estate planning solution.

Need some help? Inheritance assistance is one of our services. We would be happy to help you get started as a client.

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Chief Operating Officer, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine