IRAs & Qualified Plans Under the SECURE Act: Trusts Qualifying as Eligible Designated Beneficiaries
While many people have a specific individual or individuals named as direct beneficiaries of IRAs and other retirement plans, there are various circumstances that may lend themselves to naming a trust as the beneficiary. These may include protection from creditors, naming additional beneficiaries, second marriages or blended family considerations, and controlling receipt of IRA proceeds by the beneficiaries (i.e., minor children).
The SECURE Act changed the timing of required minimum distributions for many beneficiaries of IRAs and other qualified plans (discussed in more detail here). Trusts that were commonly set up to provide asset protection and manage tax consequences often will not result in the original desired outcome under the new laws.
Trusts having beneficiaries that do not meet the “Eligible Designated Beneficiary” regulations under the SECURE Act are now presented with new complexities. These include potential loss of asset protection, younger beneficiaries receiving much more than anticipated in a shorter timeframe and significant tax ramifications that may be different than your intent and expectations.
Consider See-Through Trusts
Two types of trusts, a conduit trust and an accumulation trust (often called see-through trusts as they look through to the underlying beneficiaries), can qualify as Eligible Designated Beneficiaries if properly structured, allowing either a 10-year or life expectancy distribution payout rather than the shorter 5-year payout rule. (The drafting details of these types of trusts play a very important role in comprehensive planning, so make sure you work with an advisor who specializes in this area.)
Conduit trusts are designed to force out IRA required minimum distributions (RMDs) to the trust beneficiaries when received. In other words, whenever a distribution is made from an IRA to the trust, the trustee must distribute the IRA proceeds to the trust beneficiary. The beneficiary will take this income into account for tax purposes at his or her individual income tax rates.
Another type of see-though trust is commonly referred to as an accumulation trust. An accumulation trust that gives the trustee discretion to determine when and how much trust income to distribute, including RMDs, provides the ability to balance the wishes of the account owner with the potential tax consequences to the trust and/or beneficiaries.
The SECURE Act does not change the function of a conduit trust or accumulation trust but can significantly shorten the timing of the distributions for certain beneficiaries. This, in turn, can completely overturn the careful estate planning that you did just a few years ago.
Understanding how your beneficiary designations work in combination with your will and any trusts you have created can have a major impact on how your wishes compare to what really happens after you are gone.
What You Need to Know
- Four criteria must be met to qualify a trust as an Eligible Designated Beneficiary. A qualifying trust, commonly referred to as a see-through trust, will be able to use the entire stretch period, just as before and must:
- a) Be valid and legal under state law
- b) Be or become irrevocable upon the owner’s death
- c) Have identifiable individual beneficiaries who are designated beneficiaries
- d) Provide a copy of the trust document to the trust administrator no later than October 31 of the year following the year of the owner’s death
- It can provide that it is to be divided immediately upon the death of the IRA owner into separate trusts for each beneficiary.
- It can provide that no beneficiary, other than the Eligible Designated Beneficiary, has any right to the IRA funds until the death of the Eligible Designated Beneficiary.
Questions to ask: Do I have a trust named as a beneficiary of an IRA, ROTH IRA and/or qualified retirement plan? If so, have I consulted a professional to review and confirm distribution scenarios at my passing under the new law?