See-Through Trusts: Are you an IRA Expert?

By Jeffery Levine, IRA Technical Expert  
Follow Me on Twitter: @IRAGuru4EdSlott

Welcome to this month’s installment of Are You an IRA Expert? Always thought you knew more than the next guy about IRAs and retirement accounts? Well now’s your chance to prove it. Below are three questions, ranging from beginner to expert. Test your IRA skills by trying to get all three right!

Questions
Beginner: What is a “see-through” (a.k.a. “look -through”) trust?

Intermediate: What are the four requirements for a trust to be considered a see-through trust?

Expert: Tim has named a discretionary (a.k.a. accumulation) trust that qualifies as a see-through trust as the beneficiary of his IRA. The current (income) beneficiaries of the trust are his children. After his children die, Tim’s grandchildren will become the trust beneficiaries. After the death of his grandchildren, the balance of the trust assets will pass to the Salvation Army. For the purpose of calculating required minimum distributions from Tim’s IRA after death, what is the correct life expectancy to use?

Answers
Beginner: Only designated beneficiaries are allowed to stretch inherited retirement accounts. In general, a designated beneficiary is a living, breathing person. A special exception exists however, for see-through trusts. A see-through trust is a trust that meets certain provisions (see below) that allow the beneficiaries of the trust to stretch distributions out over the age of the oldest trust beneficiary’s life expectancy.

Intermediate: For a trust to qualify as a see-through trust…
1) It must be valid under state law
2) It must be irrevocable at death
3) The beneficiaries must be identifiable
4) A copy of the trust must be given to the custodian by October 31st of the year following the year of death.

Expert: Tim’s IRA must be emptied by the end of the fifth year after the year of death. When a discretionary trust is named as a beneficiary of an IRA, the age of the “oldest” beneficiary is determined after considering both the current and future beneficiaries. Here Tim’s trust provides that the Salvation Army, a future beneficiary, will receive any remaining trust assets after the death of his grandchildren. Since a charity is not a living, breathing person and has no life expectancy, the “oldest” beneficiary has no life expectancy and the entire IRA must be withdrawn using the 5-year rule.

So how’d you do? Are you an IRA Expert? Unless the answer is a resounding yes, you may want to consider consulting with an advisor who has specialized knowledge and training in this area when you have these, or other IRA questions.