The document discusses how recent tax law changes under the SECURE Act impact trusts named as IRA beneficiaries. It notes that trusts are commonly used as beneficiaries to protect assets for minor children, prevent rapid spending, or ensure government benefits eligibility. However, the SECURE Act now requires IRAs be distributed within 10 years of the owner's death, unless the trust benefits a spouse, minor child, or disabled person. As a result, IRA owners should review their trust documents to ensure they still qualify as "see-through trusts" and meet the new distribution rules. They may also want to consider changes to reduce higher income taxes that could apply if distributions are taxed at the trust's rate rather than the beneficiary's.

1. IS IT TIME TO REVISIT YOUR TRUST AND IRA BENEFICIARY?
Congress recently passed a major tax law change that impacts IRAs and trusts as
beneficiaries. If you or your clients have named a trust as an IRA beneficiary, it’s important to
revisit this issue. This article describes the tax law changes and what issues to consider.
Trusts as Beneficiaries of IRAs
Most IRA owners name an individual or perhaps a charitable organization as a
beneficiary. But, owners also name a trust as a primary or secondary beneficiary for a
variety of reasons. One reason is the beneficiaries are not legally old enough to receive the
distributions (i.e. minor children). Another reason is to prevent the beneficiaries from
spending the IRA at one time. A third reason is a beneficiary is disabled or in need of
governmental benefits (like SSI or Medicaid) and receiving distributions would make him or
her ineligible for those programs. The last reason is to protect beneficiaries from having to
split the IRA with an ex-spouse in a divorce or pay it to a creditor they’re liable to.
“See-Through Trusts” and Stretch IRA Distributions
If a trust is named the beneficiary of an IRA, it’s always been important for income tax
purposes that it include particular language to qualify as a “see-through trust.” If the trust
doesn’t have this language, the IRA would have to be distributed to the beneficiaries within
five years of the owner’s passing. This would mean the IRA would only grow tax-free for five
years and the distribution would be taxed at higher income tax rates. On the other hand,
including “see-through trust” language would permit the IRA to qualify for a “stretch”
distribution period (i.e. to be paid over the life expectancy of the oldest trust beneficiary) and
it would grow tax-free for a much longer time.
Two Types of “See-Through Trusts”
There are two types of trusts that qualify as “see-through trusts:” conduit trusts and
accumulation trusts. Conduit trusts require that the IRA’s minimum required distributions
(“RMDs”) be passed out to the trust beneficiaries each year. In other words, the RMD
amounts must be taken out and deposited into the trust bank account and then a check
issued to the beneficiaries. Alternatively, accumulation trusts provide that the RMDs are
annually deposited into the trust bank account, but a check is not necessarily issued to the
beneficiary each year. Instead, the RMD amounts can be held back in the trust and paid out
to the beneficiary at a later date based on the terms of the trust. The income taxation of
conduit and accumulation trusts is very different. Distributions to conduit trusts are taxed at
the beneficiaries’ income tax rates. On the other hand, distributions to accumulation trusts
are typically taxed at trust rates. Trust tax rates are much higher than individual tax rates. In
2020, trusts are taxed at the highest individual rate (37%) starting at $12,950 of trust income.
P. Haans Mulder, JD, MBA, MST, CFP®
321 Settlers Road
Holland, MI 49423
616.392.1821
phmulder@cunninghamdalman.com

2. 2
SECURE Act Changes the Rules
At the end of 2019, Congress passed the SECURE Act. This law made significant
changes to these distribution rules. It requires that the entire IRA be paid out 10 years from
the death of the account owner. However, there are important exceptions for certain trust
beneficiaries (i.e. spouses, minor children, disabled or chronically ill beneficiaries). IRAs can
be left to a trust that benefits a spouse as well as disabled or chronically ill persons and be
paid out over their lifetime. Also, trusts for beneficiaries who are minors at the time of the
account owner’s death will take RMDs over the child’s life expectancy and when that child is
18, the IRA must be paid out within 10 years.
Need to Review Trusts and IRA Beneficiary Designations
If a trust has been named the beneficiary of an IRA, it’s critical to have the document
reviewed to determine if it still qualifies as a “see-through trust” after the SECURE Act. This is
particularly important for trusts that benefit a spouse, minor children, disabled or chronically ill
persons. If changes aren’t made, the distributions may be taxed over a 10 year or even a
five-year period resulting in much higher incomes taxes. The other key issue to review is
what happens to the RMDs once the trust receives it. In other words, will they be immediately
passed onto the beneficiary or held back in trust and distributed at a later time based on the
terms of the trust? This has become much more important because the SECURE Act
changed the distribution period from the oldest trust beneficiary’s life expectancy (which could
be 20 years or more) to a mere 10 years. Distributing an IRA over such a short time may
contradict the purpose of the trust and how it was intended to benefit the beneficiary. In other
words, the IRA owner may not want the trust beneficiary to receive it that quickly because he
or she isn’t financially mature enough to handle it. IRA owners may also be concerned about
beneficiaries losing it in a divorce or to a creditor. IRA owners should contact their estate
planning attorney to review the trust distribution provisions and determine if the language is
still sufficient to fulfill its purpose.
Taxation of “See-Through Trusts”
The way the trust is taxed to the beneficiary is also important. As mentioned above, a
conduit trust has the benefit of the distributions being taxed at the beneficiary’s rate versus an
accumulation trust is typically taxed at trust rates. There are planning options to structure an
accumulation trust to be taxed to the beneficiary which would have significant income tax
savings. This should also be discussed with an estate planning attorney.
Summary of Changes
With the passage of the SECURE Act, RMDs must be paid out 10 years from the
death of the account owner. IRA owners should review whether to keep a trust as the
primary or contingent beneficiary. If that’s still appropriate, it’s critical to have the trust
document reviewed to determine if it’s compliant with the “see-though trust” rules. It’s also
important to confirm that the distribution language still fits with the IRA owner’s goals. Finally,
IRA owners should ask their estate planning attorney about the income taxation of their trust
and whether the distributions will be taxed at the beneficiary’s or the trust’s tax rate.