Naming A Trust as Beneficiary of IRAs after SECURE Act

Submitted by Paul Jacokes on Mon, 2019-12-30 20:32

I am a retired tax lawyer but did not specialize in estates and trust taxation so please forgive me if I am asking one or more proverbial “stupid” questions.

Based on my research, including a review of posts on this website, it appears that some estate planning specialists have for years advocated using an accumulation trust for IRA assets benefiting the owner’s children and/or grandchildren. At least, this is the case if the assets are substantial, there are concerns about the beneficiaries’ creditors/ex-spouses or money management skills and such a trust is consistent with the client’s other objectives. They point out that a conduit or “see-through” IRA trust eliminates this asset protection to the extent of the RMDs, and further, that the compressed tax rate brackets for trusts generally can be dealt with (e.g., with discretionary distributions as needed) or endured and the lower brackets applicable to trusts are in fact pretty favorable. So according to some specialists, the conduit trust is disfavored under old law.

My question is whether it is even more disfavored or even obsolete under the new law.

As I understand it, under the SECURE Act there are no more life expectancy-based RMDs for children or grandchildren beneficiaries who don’t have special needs. It is no longer necessary to worry about the RMD being based on the age of the oldest beneficiary of a multi-beneficiary trust, which led some (many?) estate planners to advocate a see-through trust. As long as all of the beneficiaries of the trust are individuals (i.e., “designated beneficiaries”), the entire account must be distributed by the end of the year in which the tenth anniversary of the owner’s death falls.

So is the see-through IRA trust unnecessary except in certain cases where one needs to isolate a charity or other non-individual beneficiary from other intended beneficiaries of the IRA?

If one’s primary beneficiaries are adult children and several charities, is a reasonable approach to at death set up an accumulation trust for each of the children (with the assets of a revocable living trust or via a will), making each the trustee or successor trustee of his or her own trust, and donate to the charities by transferring some of the assets in the IRAs from the existing custodian to a different custodian and naming the charities as beneficiaries (perhaps making ongoing adjustments to keep the donations at the desired level).

And does it make sense to require the trustee, absent compelling circumstances, to distribute the IRA assets in such a manner as to take advantage of tax deferral benefits, but not in a lump sum at the end if they will put the beneficiary in a much higher tax bracket? What do you think about providing that distributions must be pro rata over the 10-year period? How about no faster than pro rata over that period?

Thanks in advance for any thoughts.



Submitted by Bruce Steiner on Mon, 2019-12-30 22:11

  • Conduit trusts rarely made sense under the old law.  They forced all the assets into the beneficiary’s estate and exposed them to the beneficiary’s creditors and spouses, just not all at once.  They make even less sense under the new law since they would force everything out after 10 years.
  • It rarely makes sense to limit, mandate or prohibit distributions.  No one knows what the future will bring.
  • The see-through trust may still be needed to get 10 years rather than 5 years.
  • You don’t need a separate IRA to leave a percentage of your IRA to charity.
  • If you want to do something for charity, instead of leaving a percentage to charity, you might want to consider leaving your IRA to a charitable remainder trust, first for your children and then to charity.  That will replicate the stretch.  Your family will probably be about equally well off (or perhaps a bit better off) with a CRT than without, since the replication of the stretch will approximately offset (or perhaps more than offset) the loss of the remainder interest.
  • Bruce Steiner

Submitted by Paul Jacokes on Tue, 2019-12-31 16:22

Bruce, many thanks for your comments.  Regarding your second bullet point, I agree flexibility is desirable from the standpoint of the beneficiary.  Circumstances, including the tax laws, may change and make faster distributions desirable.  However, couldn’t an unrestricted power to distribute undercut my desire to protect the beneficiary from (1) impulsive spending, (2) needlessly squandering a tax deferral benefit, and (3) possibly the claims of creditors and ex-spouses on the entire IRA account?  As to the latter, if the beneficiary is the sole trustee of his or her own accumulation trust and the trust is subject to a “health, education, maintenance and support” standard, is it your opinion that this standard puts the undistributed IRA funds out of their reach?  As to your second bullet, are you saying that under the law as amended, to get the 10-year deferral I would need to set up separate sub -trusts below the “master” accumulation trusts containing my other assets and place a percentage of the IRA assets in each of the sub-trusts?  Is this because under the Treasury regulations a trust cannot qualify as a designated beneficiary unless it qualifies as a see-through trust, which the master trust would not?   Finally, as to fourth bullet point, I understand that I could leave a percentage of an IRA to charity, but it could not be a pecuniary amount.  I would like to be able to simulate giving pecuniary amounts to charities.  I suppose I could continually change the percentage going to the charity by resubmitting beneficiary designation forms to the custodian of the IRA as the IRAs’ values change, and perhaps that is no more trouble than shifting assets back and forth between custodians. In any case, since I now think I appreciate more fully your point about the CRT,  I will give that serious consideration as possibly the best solution.Thanks again, and have a very Happy New Year.Paul   

Submitted by Bruce Steiner on Wed, 2020-01-01 16:15

  • To avoid the issues you raise, among others, I would have a co-trustee, I would make the trusts fully discretionary rather than using a standard for distributions, and I would preclude a trustee who’s a beneficiary participating in the decision to make distribution in his/her own favor.
  • I’m not sure what you mean by master accumulation trusts and subtrusts.  We’ve always had it so that each child would have one trust for his/her share of the IRA and another trust for his/her share of the other assets.  The two trusts would be identical except for the special requirements for trusts that receive IRA benefits (nothing may ever go to anyone other than an individual not born in a year older than the year of birth of the person whose life you want to use as the measuring ilfe, nor to anyone other than an individual or another trust subject to the same restrictions).
  • You can name a charity to receive a percentage of your IRA, rounding down in case the value of your IRA goes down.  Then, in your Will, you can leave the charity a pecuniary amount, reduced by the value of any IRA benefits passing to the charity under the beneficiary designation.  Or you can simply name the charity to receive a percentage of your IRA and accept that it will be too much or too little depending on changes in the value of the IRA.
  • You should run the numbers based on your particular situation, and whatever assumptions you want as to investment returns in the CRT, tax rates and how long you think people will live.  I think that it will often work well, especially for younger beneficiaries who are likely to need substantial distributions and who aren’t likely to have taxable estates or be at high risk of creditors and spouses.  Note that under the current Section 7520 rate, if you do a CRT for the life of one person, he/she has to be at least age 27 to satisfy the 10% requirement for the charity’s interest.
  • I use bullet points because otherwise the post becomes one long paragraph even if you write it as separate paragraphs.
  • Bruce Steiner

Submitted by Paul Jacokes on Wed, 2020-01-01 16:38

Got it!  Thanks so much for your insights, Bruce.Paul Jacokes

Submitted by Edward Cotney on Thu, 2020-01-02 21:03

The Testamentary CRUT for 20 years appears to be the best solution, even before the Secure Act.  It provides a degree of asset protection, provides a nice income steam from the grave for up to 20 years for the kids and a generous gift to chairty – with potentailly some income tax savings for the kids as well.

Submitted by Randall Vaughan on Wed, 2020-01-01 16:05

Account owner who is single with a substantial IRA and substantial non-IRA assets needs/desires to give the trustee of the revocable trust discretionary control of distributions to beneficiaries until certain ages. It it seems that the strategy of the owner creating separate IRA subaccounts upon death payable to the trustee of individual retirement account trusts created FBO the individual beneficiary (and lineal descendants upon the death of the beneficiary) within the master revocable trust seems to remain the best strategy. I understand that full withdrawal for children of majority age or grandchildren must now occur within 10 years, but administering distrubutions of IRA “trust” assets and general trust assets that do not present tax issues facilitates control while maintaining the benefits for any eligible designated beneficiaries under the SECURE Act.  

Submitted by Bruce Steiner on Wed, 2020-01-01 18:32

  • Revocable trusts make sense in some cases, and in some states.  But they’re overhyped and oversold, and for most people in most states aren’t necessary and tend to be a distraction.
  • Why would the trustees only have discretion until certain ages?  
  • With limited exceptions, IRAs have to be distributed within 10 years after death.  But if you leave your IRA in trust rather than outright, that only means the trustees have to take the IRA benefits within 10 years.  The trustees don’t have to pay them out to the beneficiaries of the trust.  They may hold them in the trust.
  • Bruce Steiner

Submitted by Mel Langer on Sat, 2020-01-04 06:16

Interesting and informative discussion. One question: Why would a See Through Trust be needed to stretch a non spouse inherited IRA over 10 years, instead of 5. If beneficiary properly re-titles account ” John Doe deceased. Inherited IRA for the benefit of Jane Doe, beneficiary”, then they can “stretch” over 10 years.

Submitted by Bruce Steiner on Sat, 2020-01-04 12:59

  • You might leave retirement benefits in trust rather than outright for the same reasons you might leave other assets in trust rather than outright.  It keeps the beneficiaries’ inheritances out of their estates for estate tax purposes, and protects their inheritances against their creditors and spouses, and Medicaid.
  • The tradeoffs are the cost and complexity of adminstering a trust, and in most cases additional income tax since trusts reach the top income tax rates very quickly.
  • Bruce Steiner

Submitted by gautam SHAH on Sun, 2021-02-21 13:15

Bruce excellent clarification. i am retired and have substantial personel and IRA assets. i want to leave IRA through trust for grandchildren. should i convert to ROTH IRA some money? what will be ideal? Also are you still practicing and may be can help one on one?

Submitted by Bruce Steiner on Sun, 2021-02-21 19:54

Roth conversions are often beneficial, though you have to look at it on a case by case basis.  I wrote on this for the April 2013, https://www.kkwc.com/wp-content/uploads/2015/04/uf_Roth_Conversions_Are_More_Attractive_Under_ATRA.pdf, and June 2018, https://www.kkwc.com/wp-content/uploads/2018/08/Tax-Reform-Opens-Window-for-Roth-Conversations.pdf, issues of Trusts & Estates.
Yes, I’m still practicing:  https://www.kkwc.com/attorney/bruce-d-steiner/. 

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