These type of “see-through” trusts come into play when someone leaves an IRA to beneficiaries in a will or trust. Inherited IRA rules are different for spouses and non-spouses, and have changed under the SECURE Act. A spouse has almost limitless options, including treating an inherited IRA as his or her own, even to the extent of converting it to a Roth.
The options are much more limited for a non-spouse beneficiary. As a non-spouse, you can either take the IRA money in a lump sum or, in some cases, as required minimum distributions (or a combination of both). Under the new Setting Every Community Up for Retirement Enhancement (SECURE) Act, retirement assets must be distributed within ten years if the IRA owner died on or after January 1, 2020. This means you can take all or part or none any given year, as long as it is all distributed by the calendar end of the tenth year from when the account owner died. Prior to the enactment of the new SECURE act, the length of time was only five years.
As a non-spouse, you can take the assets all at once and there is not a 10 percent penalty for early withdrawals. You will have to pay income tax on the distribution at your ordinary income tax rate. Keep in mind that the distribution itself could bump you into a higher tax bracket, increasing the amount of taxes you have to pay. Therefore, a lump sum may not be the most tax- efficient way to access the assets.
Another way to protect these IRA assets is to make the owner’s estate the beneficiary under the beneficiary designation and then use language in a will or trust that designates all IRAs will be funded into either a conduit or acceleration trust. These are special types of trusts that must meet the following requirements:
- The trust must be irrevocable.
- All beneficiaries must be identifiable individuals by September 30th of the calendar year following the account owner’s death.
- Information regarding the trust must be provided to the plan administrator by October 31st of the calendar year following the account owner’s death.
What is the difference between a Conduit Trust and an Acceleration Trust?
In a conduit trust, the trustee must immediately distribute all available income and principal to the beneficiaries. An accumulation trust allows the trustee to accumulate the benefits. Why would this matter? If a beneficiary has creditors or is going through a divorce, an accumulation trust would protect these assets. An accumulation trust can also protect the beneficiary from his or her own bad spending decisions. Many young adults who inherit will blow through it too quickly. An acceleration trust gives the trustee the option to hold the required minimum distribution (RMD) or any other distribution and allow it accumulate into the trust’s principal.
One of the biggest advantages of an accumulation trust is that the trustee has a choice – to allow it to accumulate or treat it like a conduit trust. The disadvantage is that accumulation trusts are more complex. If simplicity is your goal and you trust your beneficiaries with receiving the distributions, then a conduit trust may be better for you. To compare the options with an experienced estate planning attorney, contact the attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
