Reasons to distribute retirement assets to a trust rather than outright to the beneficiary:
- Asset protection
- Control
- Investment management and growth
Reasons to distribute retirement assets outright to a beneficiary:
- Trusts reach the highest federal marginal income tax rate at a much lower threshold than individual taxpayers
- Legal and trustee fees
- SECURE 10-year rule may defeat purpose of the trust
Four requirements for a qualifying trust:
- Trust is valid under state law
- Trust is irrevocable or irrevocable upon participant's death
- Beneficiaries of the trust are identifiable from the trust instrument
- Documentation requirement is met
What is an "identifiable beneficiary" in a trust?
A primary beneficiary of a trust is deemed a sole designated beneficiary of an IRA (Investment Retirement Account) for purposes of determining payout period based on their age. The identity of the remainder beneficiaries of trust are irrelevant because they are potential successors.
Use of a conduit trust v. accumulation trust:
Accumulation Trust: In an accumulation trust the only possible trust beneficiaries are individuals. All possible future beneficiaries are considered successor beneficiaries. If a "countable" beneficiary is a nonindividual, the trust will not qualify as a designated beneficiary trust. The analysis is limited to beneficiaries who are actually living as of the IRA owner's death. Hypothetical and unborn beneficiaries are not counted.
An accumulation trust allows for accumulation of IRA distributions within the trust. The beneficiary is considered a designated beneficiary if the trust requirements are met. Only individuals are permitted to be beneficiaries. No nonindividual beneficiaries such as estates, charitable organizations, nonqualified trusts even if there are only remainder or successor beneficiaries.
The benefits of the accumulation trust are:
- even though the trustee must withdraw the entire IRA by the end of the 10th year following the owner's death, remaining assets may then remain in trust, be reinvested, and distributed in accord with the terms of the trust;
- may be structured as supplemental needs trusts that do not disqualify beneficiaries with disabilities from receiving government benefits;
- because the "stretch" is dead, the class of individual beneficiaries is now unlimited--there is no need to eliminate all remainder beneficiaries who are older than the primary beneficiary
Conduit Trust: A conduit trust requires that all amounts distributed from an IRA to trustee be paid directly to the primary beneficiary when received by the trustee-- a "see-through" trust. The conduit trust has limited asset protection. The primary beneficiary is deemed to be the "sole designated beneficiary" of the IRA for purposes of determining the IRA payout period. If there is a primary beneficiary, trustee can received payout at the end of 10-year period and distribute a lump sump at that time.
The conduit trust is attractive because of its relative simplicity and predictability. The conduit trust does completely sidestep the analysis of the identity of the remainder beneficiaries of the trust. The conduit trust also avoids three issues which are inherent to accumulation trusts:
- a charity or other nonindividual can be a remainder beneficiary without impacting the payout period;
- a charity or other nonindividual can be a permissible object of the primary beneficiarys' testamentary power of appointment;
- now primary beneficiary's life expectancy is irrelevant.
It may be advisable to use separate trusts for multiple beneficiaries.
