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BUCKLEY

BRION

MCGUIRE & MORRIS LLP

Raising the bar  

 

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BUCKLEY

BRION

MCGUIRE & MORRIS LLP

When a trust inherits a retirement account, one drafting choice can determine whether withdrawals must reach the beneficiary or can remain protected in trust.

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A conduit trust requires distributions received from the retirement account to be paid promptly to, or for the benefit of, specified trust beneficiaries. An accumulation trust is a qualifying “see-through” trust that does not impose that pass-through requirement. These are federal retirement-distribution classifications, not two entirely different kinds of Pennsylvania trusts. Treas. Reg. § 1.401(a)(9)-4(f)(1)–(2).

 

Why the distinction matters

 

A conduit provision can simplify which trust beneficiaries count under the retirement-account rules, but it also means the trustee cannot retain account withdrawals for later use. An accumulation trust can preserve funds for a beneficiary who needs help managing money or protection from creditors. In exchange, remainder beneficiaries may count when determining the applicable payout rules; a poorly coordinated trust can produce an unexpectedly short distribution period. Treas. Reg. § 1.401(a)(9)-4(f)(3), (6).

 

Neither design automatically allows an IRA to remain intact for a beneficiary’s lifetime. For many non-spouse beneficiaries, the inherited account must be fully distributed by the end of the tenth year after death; annual withdrawals may also be required if the owner dies after the required beginning date. Special rules apply to surviving spouses, minor children of the owner, and certain disabled, chronically ill, or similarly aged beneficiaries. Treas. Reg. §§ 1.401(a)(9)-4(e), 1.401(a)(9)-5(d)–(e).

 

The question to ask: Is it more important to give the beneficiary access to each withdrawal, or to let a trustee retain and manage those withdrawals? Review the account designation, trust beneficiaries, distribution terms, and tax consequences together before naming a trust as beneficiary.

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