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See-through Trust: Secure the Longest Possible RMD through your Estate Plan

Wondering how the SECURE Act will impact your retirement savings and distributions? Learn how using a See-through Trust may be just the solution you’re looking for.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Just a couple of years ago, the SECURE Act eradicated the stretch IRA and now requires a 10-year payout rule. However, you are still permitted to use a See-through Trust to pass IRA distributions indirectly to certain eligible beneficiaries. Further, the use of a See-through Trust can help you extend your required minimum distributions (RMDs) for as long as possible. Trust & Will explains.

What is a See-through Trust?

A See-through Trust permits an individual to pass their Individual Retirement Account (IRA) assets via trust while still achieving the tax treatment as if the trust beneficiary received the IRA directly. When the retirement account owner passes away, the chosen beneficiaries will inherit the retirement assets through the Trust. 

See-through Trusts are valid so long as they meet rigid qualifications set forth under state and federal law, which will be discussed further in the next section. 

Trusts in general, when constructed well, will help an individual protect their assets and property from creditors and certain taxes. Further, they provide better control and flexibility in the manner in which assets are distributed to beneficiaries. 

Retirement accounts are a popular asset class to pass on to loved ones following one’s death. However, certain laws create stipulations in the manner in which assets can be distributed, and to whom. Therefore, leveraging a Trust with a see-through provision can help secure your desired outcomes despite stringent rules and stipulations. 

Not sure this is the type of Trust you’re looking for? There are several types of Trusts to choose from. Read our guide on different types of Trusts to learn more about your options. 

How does a See-through Trust work?

When setting up a See-through Trust, you’ll want to make sure to satisfy legal mandates and requirements in order for the provisions to be valid. Otherwise, setting up the Trust as your designated retirement account beneficiary will not work. 

First, the Trust must be valid under state law. While these rules vary by state, they typically require documents to be witnessed and notarized. Here are some sample guidelines on how to make Trusts legally valid. You can have peace of mind knowing that your Trust is state-specific and valid by partnering with Trust & Will to create your Trust online.

Second, the Trust must be irrevocable upon the owner’s passing. This means that the Trust’s terms and beneficiaries can change at any time during the plan owner’s lifetime (if the trust is revocable during the settlor’s lifetime), but the moment they pass away, no changes can be made.

Last but not least, federal law (Reg. § 1.401(a)(9)) stipulates that See-through Trust documentation must be provided to the custodian of the retirement account by October 31 that falls within the year of the plan owner’s date of passing. These are the regulations that oversee retirement plan distributions related to the Trust.

Conduit Trust vs. Accumulation Trust

In general, See-through Trusts come in one of two forms: a Conduit Trust or Accumulation Trust. Both Trust types help achieve the same overall outcome, which is to distribute retirement assets to beneficiaries. However, depending on how the terms of the Trust are constructed, there can be some variation on how exactly the money is distributed and taxed.

With a Conduit Trust (conduit simply means passing from one to the other), any retirement distributions received by the Trustee are immediately passed on to the beneficiary. Beneficiaries, not the trust, will simply pay income tax on the distributions they receive.

Accumulation Trusts in contrast do not require all amounts to be passed through immediately to the beneficiary. Some of the assets can be retained in the Trust to accumulate and grow. With this growth, a trust income tax obligation may be created. Because trust income is taxed at a higher rate than the top individual income tax rate, accumulation trusts may be disadvantageous. However, there may be other non-tax reasons why an accumulation trust is preferred. 

Required minimum distributions (RMDs)

Required minimum distributions (RMDs) of retirement accounts play an important role when planning estates. 

If you own an individual retirement account (IRA), then you have a legal right to name a beneficiary of your choice. This is called a beneficiary designation, which is an important part of your estate planning process. Any assets that allow you to name a beneficiary will transfer directly to that beneficiary automatically upon your death. This transaction takes place outside of the probate process, thus making beneficiary designations attractive.

A required minimum distribution (RMD) is the minimum dollar amount that must be withdrawn from a retirement account each year, per federal tax law. According to the Internal Revenue Services (IRS), RMDs kick in at the age of 72 or 73 for most retirement account types. 

So how are RMDs and beneficiary designations related?

Any pre-tax contributions toward retirement are taxed as income at the time of withdrawal. Without RMDs, an individual could theoretically set aside their retirement account and allow it to grow without getting taxed forever. They could eventually pass it on to their heirs, who will eventually have to pay income tax on any distributions they take, but still benefit from the wealth that accumulated over decades first. There even used to be a “stretch IRA” that allowed designated beneficiaries to extend these RMDs, and thus defer taxes, over their life expectancy. 

However, Congress is not a fan of allowing retirement accounts to grow in perpetuity. The SECURE Act in 2020 eliminated the stretch IRA and replaced it with a 10-year payout rule. Beneficiaries are mandated to take RMDs and the retirement account cannot continue past 10 years after the death of the original retirement account owner. 

We will momentarily discuss how you can still extend your RMDs by using a see-through provision in a Trust. However, we first need to explain how eligible designated beneficiaries work under the SECURE Act.

Eligible designated beneficiaries (EDBs)

Although the SECURE Act eliminated the stretch IRA for most individuals, eligible designated beneficiaries (EDBs) can still enjoy this benefit. The Act exempts EDBs from the 10-year rule. 

Here are the five types of possible eligible designated beneficiaries (EDBs):

  • Surviving spouse

  • Children of the account owner under the age of 21 (grandchildren not permitted)

  • Individuals with disabilities

  • Individuals with chronic illnesses

  • Individuals who are not more than 10 years younger or older than the IRA owner

So long as an individual is named as a designated beneficiary of a retirement account and is eligible per these IRS exemptions, they are exempt from the 10-year rule of the SECURE Act. Therefore, it is very important that the retirement account owner properly names a beneficiary who is eligible as a part of their estate plan. (If they wish to qualify for this exemption.)

EDBs are determined based on the date of the retirement account owner’s death and cannot be changed. For example, an account owner may name their child as their named beneficiary on their IRA. However, let’s say this child is 35 when the account owner passes away. Per IRS rules, they are not an EDB and must finish withdrawing from the retirement account within 10 years of the original account owner’s death.

These are important rules to keep in mind when creating your estate plan, naming your beneficiaries, and keep these items updated as time passes. 

Here are some special EDB rule exemptions to note:

  1. For beneficiaries who inherited an IRA before 2020 (the year the SECURE Act was passed), they’re in luck. These beneficiaries were grandfathered and are still eligible to take stretch post-death distributions under the pre-2020 rules.

  2. See-through Trusts (Conduit Trusts) with the sole purpose of passing retirement assets to your beneficiary can qualify as an EDB. 

This brings us to the next point: setting up a Trust with a see-through provision for your IRA is a wonderful way to extend your RMDs under the SECURE Act. 

Benefits of the See-through Trust for your IRA (extend your RMDs)

Any IRAs held in the See-through Trust can receive the same RMD treatment as though the Trust beneficiary was directly named beneficiary of the IRA, maximizing their RMD payout period. 

Here’s how it works:

As the owner of your IRA, you are entitled to name anyone as its beneficiary, including a See-through Trust. Then you can designate your eligible designated beneficiaries as the beneficiaries of your Trust. By satisfying these conditions, these beneficiaries can enjoy extended RMDs as though they were named directly as your IRA beneficiary. And, if they are an EDB, they can take RMDs under the longer RMD period available to them.

If you have several beneficiaries, you can even split up your IRA into separate inheritable IRAs using your See-through Trust. That way, each of your beneficiaries may take RMDs under best possible RMD period available to them. Thus, See-through Trusts create flexibility for each of your beneficiaries’ distribution schedules.

See-through Trust example

Harry has an individual retirement account (IRA) and designates a Trust as its beneficiary. The beneficiary of the Trust itself is his 10-year old son who has a disability. He is careful that the Trust’s provisions qualify as a “see-through” trust per IRS rules. 

Although his son’s EDB status would typically end at the age of 21 (and then the 10-year rule applies), he will still enjoy stretch IRA benefits because he qualifies through his status as an individual with a disability. When Harry passes away, his son will inherit the IRA via the Trust and will qualify for the stretch IRA based on his life expectancy. This provides Harry with peace of mind knowing that his son will be provided for through the longest possible required minimum distribution timeline, rather than a lump sum.

Trust & Will now offers a See-through Trust provision

Trust & Will is pleased to announce that it now offers a see-through Trust provision! This means that a provision in the trust instrument creates see-through Trusts for any individual retirement accounts (IRAs) held in Trust. This provision helps ensure the longest required minimum distribution (RMD) timeline possible. 

The SECURE Act 2.0 was just passed earlier this year, demonstrating that retirement policy is top of mind for Congress. While we can only hope that policy changes will benefit us, they will without fail create winners and losers. Thus, it’s important to take as much control as possible. By leveraging a Trust-based estate plan, you can ensure that you’ve provided the best possible protection, control, and flexibility for both your assets and your beneficiaries. 

Find out how you can create a Trust-based estate plan with Trust & Will today! You can create a fully customizable, state-specific estate plan from the comfort of your own home in minutes. Start your Trust today!

Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.