Taxpayers with Conduit Trust Planning Should Consider Revising that Planning ASAP

Trusts have numerous benefits, including limiting beneficiary access to funds, protection of trust assets from creditors, and third party management over assets placed in the trust. Many taxpayers choose to direct their IRA accounts to be paid into trust to take advantage of payouts that can be stretched out over the lifetime of the trust beneficiaries. The tax liabilities could also be stretched out.

Maximum deferral involved meeting several regulatory requirements, referred to as an “accumulation trust,” and often these are drafted to qualify as “conduit trusts.” A conduit trust for these purposes requires the distribution to the beneficiaries of no less than the required minimum distributions (RMDs) received by the trust from the subject IRA account in the tax year it is received.

The recently passed Setting Every Up Community for Retirement Enhancement (SECURE) Act, which goes into effect on January 1, 2020, changes all of this. The SECURE ACT ends stretching distributions over the lifetime of trust beneficiaries other than spouses (with some exceptions). Instead, such accounts must be paid out no later than 10 years after death of the account owner. This may seriously diminish a settlor’s intent on establishing a trust as the beneficiary of their IRA. A taxpayer that has incorporated a conduit trust in their estate planning should consult with their planner to see if some adjustments are necessary.

See Charles Rubin, Taxpayers with Conduit Trust Planning Should Consider Revising that Planning ASAP, Rubin on Tax, December 21, 2019.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.