You are working hard – building wealth, utilizing retirement accounts, and maybe already talking with financial advisors. You have a clear path to the goals you set for yourself long ago – even if they may have changed a bit as life ebbs and flows. So, what happens next? We hear a lot about planning for retirement, but estate planning is equally important. The latter requires foresight, but it also ensures that your loved ones are taken care of and that your hard work now can still benefit them later. To efficiently protect your well-cultivated retirement assets from creditors, and distribute them to your chosen beneficiaries, a See-Through Trust should be explored and created. See-Through Trusts are a key estate-planning tool, but there are a few things you should know before moving forward.
Two Types of See-Through Trusts
The inherent goal of a See-Through Trust is to distribute retirement assets to beneficiaries upon the passing of the original IRA owner. However, there are two kinds of see-through trusts, which differ in how the money is parceled out and taxed. A Conduit Trust immediately transfers assets from the retirement account to the trust, and the beneficiary only pays income tax on the money they receive as distributions over a set amount of time, dependent upon several factors. An Accumulation Trust allows a trustee to retain and continue growing the wealth of the distributions within the trust, parceling out payments to beneficiaries as is authorized by said trustee. With an Accumulation Trust, the distributions are generally taxed at a higher rate.
The Payout Process
Before 2019, the required distributions from inherited retirement accounts were based on the life expectancy of the beneficiary. By spreading out the distributions over decades, more money was kept in the market for a longer duration of time, and the beneficiary was able to enjoy a lower tax liability. However, in 2019, the Setting Every Community Up for Retirement Act (SECURE Act) was signed into law, altering the ability for non-spouse beneficiaries to significantly spread their distributions over time. Now, under the SECURE Act, all assets from the original retirement account must be distributed within ten years of the original owner’s passing. This accelerated rate of distributions increases the income tax liabilities of beneficiaries, so the SECURE Act should be taken into consideration when planning both for retirement and your estate. It is important to note that there are four categories of beneficiaries who are not affected in the same overarching manner:
- The surviving spouse
- A chronically ill or disabled beneficiary
- An adolescent or young child
- Individuals less than 10 years younger than the retirement account owner
Conduit Trusts have specifically been impacted under the SECURE Act – especially those with multiple beneficiaries. This is because if even one designated beneficiary does not fall into one of the four eligibility categories outlined above, with the new 10-Year rule in place, the trust is now required to distribute all retirement account assets within 10 years, and cannot protect them after that. Conduit Trusts must be reviewed regularly and updated as necessary before the IRA owner passes away to maximize their value to the beneficiaries.
Setting up a See-Through trust is something that should be done with the help of an experienced estate planning attorney, as there are 4 specific requirements outlined by the United States Treasury Department that must be met for the trust to qualify as a designated beneficiary and be recognized as such by the IRS.
The trust’s underlying beneficiaries need to be identifiable and eligible.
If the trust distributions are planned to be stretched out over the life expectancy of the beneficiaries, then the Treasury requires that the trust beneficiaries be identified from the start. This could either be by name or type (like “my grandchildren”), showing that they satisfy the Treasury’s stipulation of a living human being with a life expectancy as beneficiary, rather than a charity or other entity without a life expectancy, since one cannot stretch out distributions over the remaining lifetime of a beneficiary who is not alive in the first place.
The trust has to be valid and recognized in the state where it was established.
As long as you are working with a reputable attorney to draft the See-Through Trust, this should be a non-issue, as their experience would ensure the trust is legally formed under state law, and properly witnessed, notarized, and signed without accidental invalidating provisions. As much of an easy step as this requirement should be, it highlights the importance of working with a knowledgeable law firm that can draft and execute the See-Through Trust correctly and seamlessly, to help safeguard against issues arising later.
The terms of the trust are irrevocable or become irrevocable upon the death of the original IRA owner.
It is important to note that while being irrevocable is a concrete requirement of a See-Through Trust, the IRA beneficiary designations are still revocable until death, so the IRA owner can change beneficiaries simply by getting rid of the original trust or by creating a new irrevocable trust as the beneficiary. This can get complicated, so it is best to work with experienced estate planners to ensure that all is in order and the trust continues to qualify as a See-Through Trust.
Trust documentation must be provided to the retirement account custodian by October 31 of the year following the IRA owner’s passing.
This stipulates that the IRA custodian receives a copy of the irrevocable See-Through Trust document, or a final list of all trust beneficiaries, along with certification by the trustee that all requirements are met for distributions.
It’s a Complicated World Out There, But We Can Help
There are many benefits to thinking ahead, especially when it comes to retirement and estate planning. Above all is the peace of mind that comes with knowing that you have set yourself and your loved ones up for a secure financial future. With the help of our expert team at Lowthorp, Richards, McMillan, Miller & Templeman, we can help you successfully navigate options and regulations as you plan for the future. Together, we will evaluate your assets, discuss your goals, and work with you to prepare, provide, implement and continually evaluate estate planning options that best serve you and your family. For more information, we invite you to visit our website, or call us at 805-981-8555.