By: Kevin M. Helmich, Esq. Naming a trust as a beneficiary of an IRA is quite complicated. If you do it wrong, you can trigger total distribution of the retirement account within 5 years of the date of death. This would accelerate the recognition of income on the retirement account. With larger retirement accounts, such acceleration of income tax liability can be significant.
There are two different types of trusts that can meet the rules regarding qualified beneficiaries of a retirement account. One type of trust is an “Accumulation Trust”. The other is a “Conduit Trust”. With an Accumulation Trust, the trust itself qualifies as the beneficiary. This allows the creator of the trust to control the timing and amount of distributions from the trust to the beneficiaries. To qualify as an Accumulation Trust, however, all beneficiaries of the trust must be qualified beneficiaries. For example, let’s say a trust was established for a child’s benefit. The trust would be distributed outright to the child when the child reached 30 years of age. If the child died prior to reaching 30, the trust would pass to the child’s descendants. If the child had no descendants, then the trust would pass to the grantor’s favorite charity. This is a fairly standard type of distributive scheme. Such a trust would not qualify as an Accumulation Trust, and would trigger accelerated distributions if it was named as the beneficiary of a retirement account. Charities don’t meet the requirements of a qualified beneficiary because they do not have a life expectancy. An Accumulation Trust pays out over the life expectancy of the eldest trust beneficiary. If a charity is a potential beneficiary of a trust, and given that a charity doesn’t have a life expectancy, the entire trust would be disqualified as an Accumulation Trust.
As stated above, an alternative to an Accumulation Trust is a Conduit Trust. A Conduit Trust is aptly named, because the trust acts merely as a conduit through to the beneficiary with regards to distribution from a retirement account. To qualify as a Conduit Trust, the trust must mandate that required minimum distributions (“RMD’s”) from a retirement account are paid out to the income beneficiary of the trust. If the RMD exceeds what the creator of the trust wishes to be distributed to the beneficiary, the RMD must nevertheless be distributed. Additionally, Conduit Trusts do not allow income to be “sprayed” among multiple beneficiaries. A Conduit Trust can greatly limit the flexibility and control of the creator of the trust in crafting a distributive scheme.
As with so many areas of the law, whether to name a trust as a beneficiary of a retirement account and what type of trust to use if you do so involves choosing among several different alternatives. One alternative is not necessarily better than another; it is just different. In order to make an intelligent selection from the available alternatives, you need to speak with a qualified professional who is able to explain the implications of each alternative as they relate to your particular situation.