As if planning for retirement wasn’t sufficiently stressful, there are so many inscrutable types of trusts and many more estate planning instruments that are obscure. The good news is that these tools provide significant value to investors – when used appropriately. It is essential to know the legal and technical details to ensure the full benefits of your instruments are achieved, and tax penalties or other losses are avoided. When trusts are properly written and executed, the founder and beneficiaries’ lives are enriched. Fruits of the labors of the trust’s creators are distributed to the intended individuals or institutions for good reasons.
A trust, as we have discussed in previous blog posts, is an essential estate planning tool for many people. In one post, we discussed the differences between wills and trusts. We also discussed living trusts and how they might bypass a lengthy, costly probate process. They are almost de rigueur in today’s estate planning world. The question to answer now is about a particular type of trust, the See-Through Trust.
The Definition of a See-Through Trust
A See-Through Trust is a trust that allows individuals to pass retirement assets developed in their individual retirement accounts (IRAs) to beneficiaries of their choosing. The trust will act as a designated beneficiary of the IRA. The trust is irrevocable when the founder dies, though beneficiaries may still be changed in his or her lifetime. There are two types of See-Through Trusts: Conduit and Accumulation Trusts. They have different methods of distribution. The Conduit Trust instantly transfers assets from the retirement account to the trust. Thus, the beneficiary only pays income tax on the distributions they receive over a set amount of time.
Different rules apply where the decedent passed before January 1, 2020. As a result of legal changes, conduit trusts will no longer protect assets from creditors or the beneficiaries themselves outside of the 10-year period, with the exception of a beneficiary who is an eligible designated beneficiary (these include surviving spouses, minor children of the original IRA owner, disabled or chronically ill individuals, and beneficiaries who are no more than ten years younger than the owner of the original IRA).
Further, there may only be one required minimum distribution at the end of the 10-year period, depending on who the identifiable beneficiaries are.
An Accumulation Trust allows a trustee the discretion to retain and continue growing the wealth of the distributions within the trust, parceling out payments to beneficiaries as authorized by the trustee. With an Accumulation Trust, the distributions can be taxed at a higher rate. Trusts may be taxed at compressed tax brackets and reach the top effective income tax rate sooner than those of individuals. Assets remaining in the trust have a higher degree of protection, in many cases, against outside parties, such as creditors.
See-Through Trust Distributions
One unique feature of these trusts is their distribution timeline. Congress wanted to impose a limit on the “extension” granted to the IRAs and not allow them to live in perpetuity. Thus, beneficiaries are required to process minimum distributions.
The required distributions, before 2019, from inherited retirement accounts, were based on the life expectancy of the beneficiary. Spreading out the distributions over decades kept more money in the market for a longer duration of time, and the beneficiary was able to enjoy a lower tax liability. In 2019, however, the Setting Every Community Up for Retirement Act (SECURE Act) became law, changing the power of non-spouse beneficiaries to significantly extend their distributions over time. This legislation changed the rules that regulate the way qualified assets are distributed to the trust’s beneficiaries.
Now, after the passing of the SECURE Act, all assets from the original retirement account must be distributed within ten years of the original owner’s death. This accelerated pace of distributions raises the income tax liabilities of beneficiaries, so the SECURE Act should be considered when planning your retirement and estate. It is important to realize that there are four types of beneficiaries who are not impacted in the same overarching manner: a surviving spouse, a chronically ill or disabled beneficiary, a minor child, and individuals less than 10 years younger than the retirement account owner.
Conduit Trusts have expressly been impacted under the SECURE Act – especially those with multiple beneficiaries. 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.
New laws are interpreted by the courts reasonably frequently during the first several years of their existence. This makes it paramount to seek expert advice while trying to utilize See-Through Trusts in your estate plan. They can still be very effective tools to help you ensure that your estate planning goals are met.
Contact Us Today
In this unforeseen economic and political atmosphere, it is most reasonable to do what you can to create certitude and reduce risk. See-Through Trusts could be an essential component of your estate plan to maximize asset protection and minimize taxes. Please do not hesitate to contact one of our experienced lawyers for legal advice. Call the trusted estate planning attorneys at Lowthorp, Richards, McMillan, Miller & Templeman at (805) 981-8555 or fill out our online contact form. We operate primarily in the Tri-Counties area – Ventura, Santa Barbara, and San Luis Obispo.