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New IRS Regulations Applicable to SECURE Act – Part 4

In this last post on the new SECURE Act regulations we’ll cover how naming a trust as a beneficiary of a retirement account is affected by this new law.  First, however, lets look at the problem of naming a trust as beneficiary and how the law before SECURE Act treated trusts.

Before SECURE, leaving IRAs and other tax deferred retirement accounts to a trust had to be handled carefully because beneficiaries that are trusts did not automatically qualify for continued tax deferred status.  In order to be able to rollover and stretch out payments to the death beneficiary, a trust had to be considered a “see through”trust, meaning the trust itself would not be considered the beneficiary but rather we must see through the trust to the beneficiaries.

The term “see through trust” was not an official term.  Under the SECURE Act it is now clearly defined by a 4 part test.  The trust must be valid under state law, irrevocable at death (or earlier), a copy of the trust given to the plan administrator and the trust beneficiaries must be identifiable.  This means we must be able to identify who is entitled to receive benefits from the trust.

If the trust meets these requirements then we can look to the beneficiaries to determine whether they qualify as eligible designated beneficiaries and what minimum required distribution rules will apply.  While this give some clarity to the trust rules, as is typical with any new law things are also a bit more complicated.  Testing whether a trust is see through now involves identifying 3 tiers of beneficiaries.

Additionally, these tiers are defined  differently depending on whether the see through trust is a conduit trust or an accumulation trust.  If the trust terms provide that all distributions, when received by the trustee, will be paid to the beneficiaries then we are dealing with a conduit trust.  The trust simply acts as a conduit for the proceeds to reach the beneficiaries.  On the other hand, if any of the distributions can be accumulated by the trustee and not distributed then we know the trust is an accumulation trust.

Once we know what kind of trust it is we can identify the beneficiaries and place them into the different tiers to know which ones we count and which ones we do not when deciding who the eligible beneficiaries are.

As I outlined in my last 3 previous posts, there are certain eligible beneficiaries who can qualify for rollover or stretch provisions which help minimize the income tax hit for withdrawing money from retirement accounts. The purpose of these new trust rules is to give some clarity to how to treat trusts under the new law.  

When you get through all the changes it sounds as, if not more, complicated as the old rules.  For this reason, it is best to consult with a knowledgeable estate planning attorney to be sure you achieve your desired result.