Conduit Trust for a Minor
I’ve read where a trust that is setup as a “conduit trust” is best for stretching of Roth IRA distributions. But it sounds like nothing stays in that type of trust, and the whole point (in the case with minors involved) is to keep the funds out of the child’s hands until they have a chance to mature. What is typically setup on the “receiving end” of a conduit trust, so that a more mature adult can manage the assets for the child’s benefit?
Permalink Submitted by Bruce Steiner on Tue, 2016-05-31 18:04
You are correct. That’s why conduit trusts rarely if ever make any sense. The better approach is generally to give the trustees discretion as to distributions. See my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.elderlawanswers.com/Documents/Trusts%20as%20Beneficiaries%20of%20Retirement%20Benefits.pdf.
Permalink Submitted by William Tuttle on Tue, 2016-05-31 20:03
Even in the case where the trustees have discretion, there may be reasons (tax and otherwise) why some or all of a RMD might be distributed to a UTMA for later use. In other words, a discretionary trust can always still provide a partial or complete conduit of the RMDs, but only if it makes sense at that point in time. Of course all the usual UTMA caveats apply.
Permalink Submitted by Amar Patel on Wed, 2016-06-01 03:14
Hi, thanks for those answers. I think I see what is meant by giving the trustee the discretion to provide a partial or complete conduit. But I’ve read where the use of an accumulation trust potentially ruins the span over which RMDs can be stretched if the beneficiaries are not structured carefully (potentially disastrously). I would think that (stretching) to be very valuable, especially if my soon-to-be-born son can stretch it over his lifetime in case of my premature demise (while the Roth IRA grows in the meantime). And in the case of a conduit trust, even if the “destination” is a UTMA that is given over to my son at age 18/21/25 (whatever it is in Indiana), the trustee of the trust can still keep control of the flow out from the Roth IRA until the trustee is convinced the boy understands the power of compounding, shows good financial habits, etc. and reliquishes the assets to him. Right?
Permalink Submitted by William Tuttle on Wed, 2016-06-01 05:18
Even if the trust is not a conduit trust, it can be properly constructed such that the it fully qualifies for a lifetime distribution of the IRA. It just seperates the distributions of the IRA fom the distributions of the trust. The fact that any of the IRA distributions are accumulated in the trust have no bearing on the qualification of the trust for look thru treatment.
Permalink Submitted by Amar Patel on Thu, 2016-06-02 01:46
I think I understand proper trust construction (the 4-5 provisions that a human be identified as trust beneficiary, paperwork is filed timely, etc.). What I think I’m struggling with is how to structure the beneficiary designations of such a trust. Meaning, if I pass, my Roth IRA would first pass to my wife. But if she does not survive me, then it would pass to my son. If my son happens to be under the age of, say, 28, then I’d perhaps want the maturity/wisdom/experience of a more mature money manager involved for his benefit. Sounds like the perfect situation for an accumulation trust. However, currently we just have the 1 son on the way. No other children. I’m not sure what to do about if the son somehow does not survive me and my wife. I think the trust documentation would have the option to set contingent beneficiaries, but naming anyone else (my parents, my wife parents, our siblings, etc.) potentially ruins the stretching the boy could do (because they are all decades older). Even most of his cousins are over a decade older. I get that the contingent beneficiary should be similar in age (ideally, a sibling), but no such sibling yet exists. Until then, what are the options? Skip the designation of a contingent beneficiary?