Conduit Trusts as IRA Beneficiary under the SECURE Act

Submitted by Jack Thomas on Thu, 2020-05-28 16:56

Can a conduit trust still be named as beneficiary of an IRA and pay out over 10 years to the beneficiaries at the beneficiaries tax rates? Or would distributions always be taxed to the trust?



Submitted by Alan - IRA critic on Thu, 2020-05-28 17:43

A conduit trust MUST pass through distributions to the conduit beneficiary, and these distributions will be reported and taxable at the beneficiary’s tax rate. That said, there may be some conduit trusts in existence that restrict the IRA distributions to RMDs. For those trusts, because there is no annual RMD, just the 10 year rule, the adverse result is that no IRA distribution can be made until the 10 th year, in which case the entire balance would be taxed in a single year. It will be taxed at the beneficiary’s rate but the lump sum distribution might well spike the beneficiary’s tax rate in year 10. These types of trusts need to be replaced ASAP.

Submitted by Bruce Steiner on Fri, 2020-05-29 19:56

  • You may leave your IRA to a conduit trust.  However, conduit trusts rarely made sense even before the SECURE Act.  The problem with the conduit trust is that all of the IRA distributions are forced out to the current beneficiary, thus throwing them into the beneficiary’s estate for estate tax purposes and exposing them to the beneficiary’s creditors and spouses, even if not all at once.  I don’t know why they received so much attention.
  • The exception what that in the rare case where there was no better solution than to leave the IRA in trust for the spouse in trust, a conduit trust for the spouse lets you recalculate the spouse’s life expectancy each year.
  • Some people weren’t concerned about forcing out the distributions since the amounts, at least in the early years, weren’t that much.  However, under the SECURE Act, this is more of a concern since the entire IRA much generally be distributed by the end of the 10th calendar year following the IRA owner’s death.
  • However, with the rollover not as valuable as it was before, we may see more conduit trusts for the spouse (though it still gives up the rollover and the potential Roth conversion).
  • I’ve never seen any conduit trusts that limited distributions to the required distributions, but that doesn’t mean no one ever did that.
  • Bruce Steiner

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