Testamentary Conduit Trust
Client has named a testamentary conduit trust as contingent beneficiary (spouse is primary) of SEP-IRA account (approx. $400,000+ future contributions/growth) and 403b ($65,000) account for the benefit of one minor child. The question is whether or not to do the same with smaller Roth IRA ($25,000) and Inherited IRA ($60,000) or to name a UTMA Custodian as contingent for the benefit of the same minor child. Any food for thought would be greatly appreciated.
Permalink Submitted by mk foss on Tue, 2012-09-18 23:33
With a UTMA as the beneficairy, the minor child has access to the entire retirement account at age 18,21 or whatever late date (if any) your state will allow. There may be many responsible 18-25 year olds, but none of them are related to me. I would prefer the more rigid life expectancy payout that you get with a trust. The trust can also protect the beneficiary from an ex-spouse and creditors.
Naming an individual beneficiary is best for a surviving spouse or mature relative but I worry that it might be too much of a temptation for a young person. With the trust, the trustee can be given the power to increase distributions under specified circumstances like college, a wedding, a home purchase etc. You get the longest stretch out when you name a young beneficiary but that stretchout goes away if they withdraw the funds rapidly.
Permalink Submitted by Bruce Steiner on Wed, 2012-09-19 01:00
A conduit trust rarely if ever makes sense. If the child lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust. All of the assets will have been distributed to the child, included in the child’s estate, and subject to the child’s creditors. If you give the trustees discretion as to distributions, the trustees can distribute if appropriate, but can also accumulate the assets in the trust where they will be kept out of the child’s estate and protected against the child’s potential creditors (including spouses).
Here is an article I wrote on trusts as beneficiaries of retirement benefits: http://www.kkwc.com/docs/AR20041209132954.pdf . It appeared in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal.
Permalink Submitted by mk foss on Wed, 2012-09-19 01:24
Bruce is not saying that the UTMA is preferable to a conduit trust, they both have negatives. A testamentary trust that is not a conduit trust, is his recommendation. I still contend that the conduit trust is better than the UTMA even if it has some drawbacks.
Permalink Submitted by Bruce Steiner on Wed, 2012-09-19 01:37
If the amount involved is sufficient to warrant administering a trust (which I think is the case here but it’s up to the initial poster’s client to decide), we would leave these benefits to a discretionary trust. If the amount involved is not sufficient to warrant administering a trust, we would leave these benefits to a custodian under the Uniform Transfers to Minors Act.
So while Mary Kay is correct that, if the amount involved is sufficient to warrant administering a trust, a conduit trust is better than no trust at all, I still don’t see any place for a conduit trust.
Permalink Submitted by John Panaro on Wed, 2012-09-19 12:04
Thanks everyone for all the insight.
The client understands the pros and cons of the conduit trust and has decided to make that the contingent (after the spouse) beneficary the larger pre-tax accounts. He’s not concerned about exposing the assets to taxes, creditors, divorce, etc. as there are also significant other non-qualified assets that would be held in trust if both parents pass as well as life insurance in irrevocable trusts.
Given the above, the question now relates to the smaller Roth and Inherited IRA (client is taking RMDs based on an older siblings life expectancy) accounts and their respective different characteristics. i.e. Is there any reason related to the different distribution requirements for these two smaller accounts that makes it preferable to use the testamentary minors trust in the will or UTMA as contingent instead? Said another way, is there any reason why it would be a bad idea to “commingle” (for lack of a better word) the three differnet types of money in the one trust? FYI, the trust provision in the will reads “including but not limited to any non-Roth IRA IRA accounts”.)
Thanks again!
Permalink Submitted by Bruce Steiner on Wed, 2012-09-19 13:07
Yes, there are reasons not to commingle the different types of benefits, but since your client doesn’t care about the disadvantages of the conduit trust, he probably won’t care about the disadvantages of commingling the different types of benefits either.
Permalink Submitted by John Panaro on Fri, 2012-09-21 17:03
Not following you Bruce…can you be more specific about te disadvantages of commingling the different types of benefits? Thanks in advance.